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There's a lengthy list of risks piling up upstream of our economic scenario. In addition to the geopolitical and political risks, consider also the following concerns: collapsing Chinese growth; a brutal, uncontrolled depreciation of its currency by Beijing; commodity prices plummeting again; a sharp slowdown in US growth; a sharp increase in corporate bankruptcies in the US oil sector; Eurozone deflation; and the inevitable miring of the emerging world in recession. These risks are especially frightening as gauging their possible dire consequences is a difficult, if not impossible, task… particularly as they are all connected and mutually sustaining.
To round off this already long list, and be certain of the imminence of catastrophic meltdown, the assumption that central banks have already used up all their ammunition is sometimes put forward. In the event of a marked growth slowdown, in the US in particular, it is felt that central banks would lack any means of action.
The BoE left its monetary policy unchanged in February, in line with expectations. The decision was unanimous, making a change from the outcome of votes in previous months. The BoE made significant downward revisions to its growth and CPI inflation projections alongside its February Inflation Report, with inflation projected to remain below the 2% target until the end of 2017.
Our Quantitative Easing impact indicator continued to edge down in October, following the virtually across-the-board deterioration in monetary and financial conditions observed over the summer. The monetary policy transmission channels that most immediately responded to the launch of the policy at the start of the year are those that have deteriorated most.
Highlights: In Central Europe, the standard of living is calculated according to GDP at purchasing power parity per capita. The Algerian Prime Minister sounds the alarm. Decoupling in variations in Nigerian naira and Angolan kwanza against the dollar. India posts an improvement… in industrial production. Brazil must solve its inflation conundrum.
2014 was a disappointing year for the Eurozone. The more upbeat expectations observed in late 2013 did not materialise in a recovery that has turned out to be more laboured than expected. The slight pick-up in activity in Q3 (+0.2% QoQ after +0.1% in Q2) did not radically alter the flat profile of activity since the spring. The forecast 0.9% growth rate for 2014 implies a new widening of the growth gap with the other large economies.
This is because the EMU area has shown considerable vulnerability to the drop in emerging-economy imports. The divergence in growth levels among EU member states has remained significant, despite the slowing of the core economies and a recovery in some peripheral countries. The underlying imbalances that are driving this divergence cannot easily be absorbed in a low-growth, low-inflation environment, and this will certainly remain true out to our forecasting horizon.
Fears of seeing the Eurozone sink into deflation, against a backdrop of the spectre of the Japanese example, have propelled inflation centre stage. France has not been spared the general price downtrend and inflation has fallen substantially in the recent period, with prices rising by just 0.3% in the 12 months to end-September. In this issue, we aim to examine the causes of this slowdown in prices, or rather the accumulation of factors that have led to the current severe disinflation.
Despite the hesitant start to the year, we are forecasting that the growth rate will pick up in all the large economies in 2014. While we are more confident about the self-sustaining character of US growth, uncertainties persist as regards Japan, where monetary stimulus has been put on hold even before the inflation target has been reached. In the Eurozone, the emergence from recession in Southern Europe is being accompanied by a generally laboured recovery. The forecast re-composition of cyclical and inflation divergences between regions is helping to keep the spectre of deflationary pressures – which could derail the timid recovery in Europe – at bay.
The core CPI inflation continued to accelerate in October, up to a 5-year high of 0.9% YoY, from 0.7% in September. Nevertheless, we maintain our initial view that the BoJ will not be able to achieve the price target by the time it promised, i.e., by April 2015.
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