The key underlying theme this quarter remains the interaction between an increasingly negative demand shock in the form of the ongoing credit crunch and the increasingly supply-driven commodity price shock. However, this quarter we highlight the different aproaches adopted by the respective central banks in our forecast to this confluence of adverse shocks. We find strong empirical evidence to support the view that the Fed’s aggressive discretionarily loose policy stance runs a high risk of dislodging inflation expectations.
As usual our central projection is based on current market pricing and consensus forecasts. The risks to this forecast are clearly skewed to the downside, as they are in all of our growth fan charts. But the most heavily downward skewed forecast is that for the UK, where we are pricing in a one in three chance of annual growth slipping below zero over the next twelve months – a far greater probability than for anywhere else.
By contrast, all of our inflation fan charts are skewed to the upside, particularly that for the US. We attach a 13% chance to US headline CPI inflation being above 4% in a year’s time; compared to a less than 1% chance for the other three economies. |
