- Global GDP growth has dipped below 2% for the first time since the dark days of 2009. We expect a gradual re-acceleration over the next 3-4 years but the “three-speed” global economy recently outlined by Christine Lagarde remains in place. The IMF’s Managing Director said there are three types of country: those that are doing well (e.g. East Asia and Sub-Saharan Africa); those that are on the mend (e.g. the US and Sweden); and those that still have some distance to travel (e.g. the Eurozone and Japan).
- We would place the UK economy towards the top end of the “distance to travel” category. Consumer indebtedness has fallen, but remains elevated. Fiscal austerity still has five years to run. And the much-hoped for revival in exports is yet to materialise – the trade deficit has barely budged over the past five years despite a 20% fall in the value of sterling. On our forecast, annual GDP growth averages just 1% over the next two years – better than the Eurozone (0%) and Japan (0.7%), but slower than the US (2%) and of course way behind China (8%).
- We have entered a new era for monetary policy. The US started giving forward guidance last year, promising to keep rates on hold until the unemployment rate fell below 6.5%. And Japan recently announced bold steps to avoid a third ‘lost decade’. If recoveries continue to disappoint in these, or other developed countries like the UK, then we would expect to see even more creative and unusual monetary policies come to the fore, given the inability of highly-indebted governments to stimulate their economies. The challenge facing policy-makers is most daunting in the Eurozone. The Cypriot bailout has undermined progress towards a banking union. And the Italian election has underlined the political divergences within countries with regard to dealing with the ongoing crisis.
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