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Economic Outlook: Slow Progress

05/13/2016

While the U.S. is likely to lead global growth higher in 2016, risks such as disappointing Chinese expansion, even lower commodity prices, and geopolitical shocks persist, says Stewart Robertson, Senior Economist (UK and Europe) at Aviva Investors.

The start of 2016 was marked by a sharp increase in volatility in financial markets, as growth fears sparked weaker oil prices, wider credit spreads, and sharply lower equity prices. While economic data has generally turned for the better since the start of 2016, global growth expectations for the remainder of the year have been marked down. This reflects weaker growth in both "developed" and "emerging" market economies. While the U.S. is likely to lead global growth higher in 2016, risks such as disappointing Chinese expansion, even lower commodity prices, and geopolitical shocks persist.

Inflation outlook subdued

Global inflationary pressures remain muted, with excess capacity and the fall in energy prices weighing on both core and headline inflation. By contrast, there is relatively little slack in the U.S., and measures of core inflation, which exclude changes in food and energy prices from calculations, are close to their pre-2008 global financial crisis averages. Assuming no further decline in oil prices, headline inflation is also likely to be close to target by the end of 2016. Given this backdrop, we expect the U.S. Federal Reserve (Fed) to hike rates once or twice in 2016. Elsewhere, inflation is likely to be well below target as spare capacity is slowly eroded. Further policy stimulus from central banks in China and Japan is likely, while an extension of the European Central Bank’s (ECB) asset purchase program can’t be ruled out.

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