Global Economic Outlook and Strategy

The global expansion is at a very delicate point, with China’s sharp slowdown, theongoing Greece crisis and the prospect that — with shrinking labour market slackand a rebound in Q2 GDP growth — Fed tightening is likely to start quite soon. Weare cutting 0.1 percentage point off our global growth forecasts for both 2015 and2016, putting them at 2.6% and 3.4% respectively (at current exchange rates),extending the general trend of forecast downgrades in recent years. Even afterthese downgrades, we suspect that risks to our global growth forecasts lie to thedownside, especially for 2016 and later years, and especially for emerging markets.

    We continue to expect China’s official data to show GDP growth of 6.9% in 2015and 6.7% in 2016. However, with the LKQ index up about 4% YoY, we suspect thatChina’s real GDP growth currently is actually around 4%-4% YoY. In our view,further economic weakness and further monetary easing are both likely in China,given the elevated real exchange rate and hangover from the huge credit stimulusof recent years. China’s slowdown is exacerbating weakness of world trade growthand hitting activity in a range of export-intensive or commodity-intensive economies.

    Our base case is that the first US rate hike will be in December, but it would not bea surprise if tightening starts a little earlier (i.e. September). The US expansion canprobably cope with a gradual and well-telegraphed hiking cycle. However, globalspillovers of Fed tightening are very uncertain — especially via currency swings,elevated debt levels in EMs, plus a possible rise in general risk aversion.

    At the time of writing, prospects for Greece remain highly uncertain. We still believethat agreement is possible to extend the second bailout for a few more months,hence buying time for agreement on a financing package for Greece to cover thenext year or two. However, there are multiple ways that this scenario could fallapart, tipping Greece into outcomes such as capital controls, default, introduction ofa scrip currency and/or Grexit. Such scenarios may well create contagion —especially in other euro area countries — leading to tighter financial conditions andincreased risk aversion among businesses, investors and lenders.