As we enter 2016, global growth forecasts remain low with risks firmly to the downside. Global inflation forecasts also remain muted, as the continued declines in commodity prices reduces headline inflation in developed markets. Central banks in Europe and Japan are set to continue their accommodative monetary policy, with further loosening likely in response to the growing perceived risks of slowing growth and extremely low inflation. Bank of Japan provides the most recent example.
Growth forecasts for the US and UK move lower as the major engine of growth – domestic household consumption – is unable to offset the weakness of the global environment, with this dynamic set to persist in 2016. While its recovery remains amongst the slowest in history, growth in the Eurozone remains the most resilient as we move into 2016 as fiscal accommodation increases. Emerging markets continue to be exposed to the combined pressures of continued uncertainty in China and commodity price weakness. Recessions in Russia and Brazil have been deeper than expected, while South Africa potentially joining this trend as well. Continued weakness in demand from emerging markets increases the downside risks for developed markets.
Global inflation dynamics in 2016 will remain divided by the extremely low inflation levels seen in developed markets and China, while emerging markets with flexible exchange rates continue to see inflation move higher and push the global inflation forecast up slightly in 2016.