The April/May economic indicators point to a slowing world economic growth momentum going into the second quarter. JP Morgan’s composite manufacturing PMI can in at a 21-month low in April. Slower US growth is compounded by slowing growth in emerging economies; China’s industrial sector is contracting and the Brazilian and Russian economies are mired in recession. Furthermore, oil exporting emerging economies have been hit by the lower oil price. Fortunately, these adverse tendencies are counterbalanced by a strengthening economic outlook in respect of the Euro area and better-than-expected growth in Japan. In all, the short-term economic prospects in respect of the advanced economies continue to improve (assuming the US slowdown is temporary), while forecasts in respect of the emerging economies are being scaled down (India being an important exception).
While world economic growth may have disappointed during the first half of the year, it is still expected to accelerate during the second half of the year, averaging 3.5% in 2015. On the back of 2.5% growth rates forecast for the USA and the Euro area, Japan chipping in with 1.5% and China stimulated to maintain its targeted 7% momentum, global growth can accelerate further in 2016.
Regional context
Euro area. Whereas growth concerns were in the forefront during the middle quarters of 2014, the combination of lower oil prices, more aggressive monetary policy support and a weaker euro have boosted growth prospects in the Euro area. The latest inflation reading came in at zero, suggesting deflation worries may be overdone, and real GDP growth accelerated to 1.6% during the first quarter of 2015. This momentum is expected to build further, with growth reaching the 2.5% mark in 2016, much in line with the expected momentum in the leading US economy.
USA real GDP growth stalled during the first quarter of 2015, coming in at 0.2%. A number of factors are at play. Firstly, the economy was hit by bad weather (as happened in the winter months early 2014); secondly, the strength of its currency has impacted the export sector; and, thirdly, the drop in the oil price has shocked its blossoming oil sector. First quarter GDP growth revealed signs of slowing consumption and investment spending. Worries of lower potential growth going forward hamper fixed investment plans. Nonetheless, interest rate increases are likely to again be delayed (until early next year) and solid employment growth is expected to underpin the spending momentum. Growth is forecast at 2.5%-3% this year and next year.
Japanese real GDP growth came in at a higher-than-expected 2.4% during the first quarter of 2015. Lower oil prices and a competitive currency have boosted growth, which is also benefiting from macro-economic policy stimulus. This confirms that the country is moving away from the VAT-hike induced recession of 2014 (when GDP growth contracted by 0.1% on average). The growth forecasts in respect of 2015 and 2016 are in the 1.0%-1.5% range.
Pieter Laubscher
28 May 2015