Incoming information has been mixed relative to our expectations and across regions. Activity in the U.S. slid over a first-quarter icy patch, as we expected when we looked back in April, but forward-looking indicators are not as yet showing meaningful traction for a rebound in the current quarter. Real GDP growth was significantly stronger in the Euro area in the first quarter, but the problems the ECB faces with ongoing disinflation and myriad organizational threats to the European project led us to mark up annual growth only a touch. Japan’s challenges are also daunting, but the policy response of late appears haphazard and we now believe that its economy is in recession. Economic expansion in China seems to have regained a more even keel, with a broader benefit to other emerging market economies.
All told, we see real GDP growing at a 2.8% pace in 2016 and 3.3% in 2017, not much different than our last forecast. With this growth, some settling of commodity prices, and an outlook without drama on exchange rates, global inflation should run 4% and 3.6% this year and next, respectively.
Monetary policy accommodation continues almost full throttle, with the Fed likely nudging up its policy rate at most twice this year even as the other major central banks venture deeper into the terrain of unconventional policies.
Political uncertainties abound, including the referendum on Britain’s link to the European Union, elections in the U.S. in November, parliamentary elections in other important economies, and a probable presidential impeachment in Brazil. These pose challenges in forecasting and important impediments to spending. Anyone with the ability to defer a decision probably sees merit in doing so, at least for a time. This is part of our unwillingness to factor in a significant rebound in global economic growth in the latter part of this year and our nervousness that is reflected in the assessment of downside risks to growth.