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Disinflation, eurozone and China pose threat to global growth: Reuters poll

[BENGALURU] Global economic growth will be modest at best in the coming year as weak inflation persists, Reuters polls showed on Thursday, while a faltering eurozone and China could restrain it further.

The last few months have been marked by rapidly-cooling inflation - driven by a spectacular 60 per cent fall in oil prices since June - with consumer price rises in many cases far below stability targets set by central banks.

Indeed, eurozone inflation in December turned to overall price falls for the first time since 2009 and economists now see a 90 per cent probability the European Central Bank will print money through government bond purchases, possibly as early as next week.

That prospect drove the Swiss National Bank on Thursday to abandon its more than three-year-old cap on the franc.

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But even if the ECB does engage in sovereign debt purchases, it is not clear if it would make much difference given that euro bond yields are already so low and the currency weaker.

Economists polled over the past week by Reuters say the biggest risk to the global economy this year will be weaker growth than previously forecast in the eurozone and China, followed closely by disinflation in major economies. "The global economy started the year by exposing some of the same uncertainties left by the year that just ended," said Diane Schumaker-Krieg, global head of research at Wells Fargo.

"The rest of the global economy is not doing much better than the eurozone, with Chinese economic growth expected to slow down further over the next several years."

Overall, the poll showed the world economy will grow 3.5 per cent this year and 3.8 per cent in 2016, unchanged from October's forecasts.

The World Bank on Tuesday lowered its global growth forecast to just 3.0 per cent for 2015 and to 3.3 per cent for next year on a bleak outlook for the eurozone and Japan, which continue to face deflation fears.

It also warned world economic growth was "running on a single engine." The US economy, the world's largest, is forecast to have shifted into higher gear and economists expect the Federal Reserve to raise rates by June.

The Bank of England also is expected to raise interest rates from a record low but economists were divided whether it would do so in the third or fourth quarter. Just three months ago the consensus was for a hike in the current quarter.

But low inflation in those countries has become a worry. Indeed, depressed inflation along with muted wage growth has pushed the market's implied tightening by the Fed and the BoE to much later than what economists are penciling in.

A majority of economists in the poll said the steep fall in oil prices would be positive for global consumption. But not all of them were convinced.

"The collapse in the price of oil since the middle of last year is a consequence, primarily, of weaker demand rather than stronger supply as evidence of China's rapid slowdown continues to mount," said Oliver Jones, economist at Fathom Consulting.

"That is why it is unlikely to deliver the shot in the arm that many are hoping for." With the disinflationary trend gaining ground, the Reserve Bank of India surprised markets with a 25 basis point cut in interest rates on Thursday, ahead of a scheduled meeting next month.

Elsewhere, emerging market peers are expected to be on course for a difficult year ahead.

With collapsing oil and metal prices weighing on government finances and jeopardising investments, economists chopped 2015 growth forecasts again for all of Latin America's seven largest countries, from Mexico to Argentina.

Turkey also is on course for a bumpy 2015 despite a fall in inflation while a power crisis in South Africa will undermine investor confidence and crimp economic growth there.

Reuters will publish its economic outlook polls for the top Asian economies next week.