Prospects still slim for major global economic pickup

Fri Dec 18, 2015 11:08am EST
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By Ross Finley, Silvio Cascione and Rahul Karunakar

LONDON/BRASILIA/BENGALURU (Reuters) - The world economy may be set for another year like 2015, with modest growth in developed economies offsetting persistent weakness elsewhere but generating very little inflation and keeping interest rates low.

The U.S. Federal Reserve's long-awaited rise in rates from zero showed confidence in the world's largest economy, but rival China is still struggling for a foothold with rate cuts.

Although some countries, such as Brazil, have mainly home-grown inflation troubles, the Fed's first post-crisis rate hike is an unlikely cure for what ails the rest of the world.

With exchange rates dominating the policy debate in many countries, what happens to the dollar will matter a lot.

"The key question is whether the U.S. economy is finally robust enough not only to sustain its own recovery but also to lift world trade and global growth enough to allow the external deflationary pressures weighing on U.S. inflation to wane," outlined HSBC economists Janet Henry and James Pomeroy.

Along with an abrupt downturn in the volume of global trade and a continuing fall in commodity prices, the dollar's rise this year has brought U.S. industrial growth to a near-standstill, keeping a lid on inflation pressures from abroad.

The other extreme, according to HSBC, is that the United States, "via a strong U.S. dollar, will simply become the latest victim of the deflationary pass-the-parcel which has plagued the global economy for a decade, and find itself following all of the other developed market central banks which raised rates but soon found they had to reverse course."

"The outcome, we believe, is likely to be somewhere in between."   Continued...

Men work on a construction site for a luxury apartment complex in downtown Los Angeles, California March 17, 2015. REUTERS/Lucy Nicholson