Global Economic Outlook: Continued Divergence
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Global Economic Outlook: Continued Divergence

The economic outlook for 2016 contains a number of well-known narratives, suggesting that this year will merely be a repeat of 2015 for the global economy, albeit with a somewhat more optimistic tone. However, it is worth considering the differences and associated risks. 

At the end of 2015, the global economy exhibited quite a number of similarities to the situation seen at the end of 2014: energy prices had declined significantly; the slow, but steady Eurozone recovery had proceeded further; the US labor market had exhibited a remarkable recovery; and emerging market (EM) growth remained a source of concern.

Commodity Price Declines a Net Positive

The outlook for 2016 also contains a number of well-known narratives: the ongoing policy divergence among major central banks, as the US Federal Reserve (Fed) is set to proceed with its rate-hike cycle while the European Central Bank (ECB) and the Bank of Japan (BoJ) are both pursuing relatively aggressive asset purchase programs; economic momentum in developed economies (DM) – though not absolute growth – is outpacing momentum in emerging markets (EM); and persistently low energy prices promise an economic tailwind for commodity importers, while hurting exporters. This suggests that 2016 might turn out to be a mere repeat of 2015, albeit with a somewhat more optimistic tone. However, even if some of the undercurrents that shaped the global economy in 2015 are set to remain in place, it is worth considering the differences and associated risks.

Another Year of Better DM Growth Momentum...

One of the similarities will likely be that GDP growth in major DMs remains above its longer-term trend given the aforementioned tailwind from low commodity prices, as well as (still) supportive monetary policy combined with some fiscal easing. In our view, low commodity prices remain a substantial net positive for most DMs, even though they may harm income and thus import demand in some EM.

...with Less Certainty in EM

However, even for EMs the picture is not clear-cut: large economies such as China, India and Turkey are clearly net beneficiaries of lower commodity prices, which should more than cushion weaker demand from other EMs. However, the outlook for EMs in general is more uncertain than for DMs, and growth is likely to remain below potential. Even if the global "output gap" does not widen further or even tightens slightly, this will very likely not be enough to end global disinflationary pressures.

Global GDP Growth – Advanced vs. Emerging Economies (IMF estimates)

Global GDP Growth – Advanced vs. Emerging Economies (IMF estimates) 

Source: Datastream, Credit Suisse 

Inflation – Still Downside Risks to Headline Rates

The recent renewed sharp decline in energy prices also increases the downside risks to our current forecasts for headline inflation, particularly for advanced economies with market-determined energy prices. The impact will be stronger in the case of the USA, where gasoline prices fluctuate relatively more with energy price swings, given the smaller share of taxes in retail gasoline prices compared to other economies.

What Is to Be Expected from Central Banks?

One of the buzzwords over the past few years has been "monetary policy divergence." From today's perspective, monetary policy will, in all likelihood, become tighter in the USA. The ECB and the BoJ, on the other hand, look set to continue their current asset purchase programs. So the divergence in monetary policy may indeed become wider – but this should not come as a big surprise. What is more relevant perhaps is what happens next: Will the pace of monetary policy divergence change? And if so, in what direction? From here it looks likely that the Fed will indeed be able to tighten policy gradually, but it is also unlikely to become more hawkish than its current guidance.

Divergence of Monetary Policies Likely to Persist

On the other hand, based on the expected economic performance in 2016, there seems to be little need for additional monetary easing measures in Japan and the Eurozone for the time being. Instead, it cannot be ruled out that the markets will at some point during 2016 have to evaluate the likelihood of tapering in both economies – though the actual tapering may only start at some point in 2017. In that sense, the speed at which the policy divergence is widening may remain constant for some time, but financial markets may get the perception that a slowdown in monetary policy divergence – or even the end of it – may be not too far away.

Global GDP and inflation forecasts (in %, YoY)  

    GDP     Inflation  
Country/economy 2014 2015E 2016E 2014 2015E 2016E
Global 3,3 3,0 3,3 3,2 3,2 3,7
G3 (US, EUR, JP) 1,5 1,9 1,9 1,3 0,2 1,4
BRIC
5,8 5,0 5,4 4,2 4,6 3,8
EM-8 5,7 5,3 5,4 4,1 3,6 3,6
United States
2,4 2,5 2,3 1,6 0,1 1,9
Canada 2,5 1,2 1,6 1,9 1,2 2,2
Euro area 0,9 1,5 1,7 0,4 0,1 1,0
Germany 1,6 1,6 1,6 0,8 0,2 1,1
Italy -0,4 0,7 1,5 0,2 0,2 0,7
France 0,2 1,1 1,3 0,6 0,2 1,1
Spain 1,4 3,1 2,7 -0,2 -0,6 0,8
United Kingdom 2,9 2,5 2,5 1,5 0,1 1,2
Norway 2,2 1,2 1,5 2,0 2,0 2,0
Sweden 2,4 3,2 2,7 -0,2 0,2 1,6
Switzerland 1,9 0,8 1,0 0,0 -1,0 0,0
Japan-Pacific 0,6 0,9 1,4 2,6 1,0 1,3
Japan 0,0 0,5 1,1 2,7 0,9 1,0
Australia 2,6 2,2 2,4 2,5 1,5 2,3
New Zealand 3,0 2,3 2,4 1,2 0,5 1,9
Asia ex Japan 6,3 6,0 6,1 3,4 2,5 2,8
China 7,3 7,1 7,0 2,0 1,5 1,7
Hong Kong 2,5 2,4 2,4 4,4 3,0 3,0
India (fiscal year) 7,3 7,1 7,3 7,0 5,4 6,0
Indonesia 5,0 4,7 4,9 6,4 6,5 4,9
Singapore 3,0 1,8 2,1 1,0 -0,5 0,6
South Korea 3,3 2,6 2,9 1,3 0,8 1,4
Thailand 0,9 2,5 3,0 1,9 -0,8 1,2
CEE and Russia 1,3 -0,7 1,2 6,6 11,6 6,5
Poland 3,4 3,5 3,5 0,0 -0,8 1,1
Russia 0,6 -3,5 -0,5 7,8 15,5 7,8
Turkey 2,9 3,2 2,8 8,9 7,7 7,2
Latin America 1,0 -0,9 -0,4 11,6 16,1 18,4
Argentina 0,5 0,4 -0,7 32,5 16,8 25,6
Brazil 0,1 -3,7 -3,3 6,3 9,0 7,3
Mexico 2,1 2,6 2,8 4,0 2,7 3,3
Middle East and Africa 3,4 3,1 3,1 5,1 5,1 5,7
GCC 3,3 3,3 2,8 2,6 2,4 2,5
South Africa 1,6 1,4 1,2 6,1 4,8 6,0

EM-8: Brazil, China, India, Indonesia, Korea, Mexico, Turkey and South Africa. GCC: Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, UAE.

Inflation numbers refer to the CPI for the USA and the HICP in Eurozone countries as well as the UK.

Forecasts as of 17 December 2015.

Source: Credit Suisse