We at J.P. Morgan Asset Management see the coming decade as one of relatively modest economic growth and broadly stable inflation. For most developed markets, growth expectations lie below 25-year historical averages, primarily reflecting slower population growth and labor force expansion. Still, we expect several developed-markets economies to grow more strongly than during the past ten years, a period marked by the 2008 financial crisis and a sluggish recovery. By contrast, we continue to lower our outlook on emerging markets, which are adjusting to a less friendly global environment while also confronting various home-grown challenges.
We generally expect that developed-markets central banks will come close to their official targets on inflation. Although we believe emerging-markets central banks will enjoy slightly less success in this regard, we anticipate continued single-digit inflation and do not forecast a return to the price instability that characterized much of the emerging-markets world before the 1990s.
We expect developed-markets growth to run at roughly a 1.75 percent average annualized pace over the next ten years, with the U.S. at the top end of the scale and Japan bringing up the rear. Forecasts for those two economies, along with those for the U.K., Canada and Sweden, have dropped compared with 2014. In most of these cases, each passing year results in a somewhat mechanical trimming of our expectations for labor force growth as populations steadily age.
In comparison with slow-moving demographic factors, productivity is cloaked in more mystery. Since the initial stage of the present economic expansion, productivity growth has run at an exceptionally slow clip in many developed markets. This sluggishness is likely because of many different factors, including a drop-off in technology investment by the corporate sector and the near completion of the globalization process. Although some of these explanations appear structural — or at least persistent — other forces may prove more cyclical in nature.
The more temporary forces include relatively inexpensive labor, which has encouraged firms to hire additional workers to boost capacity, instead of adding to their capital stock. With time, cyclical influences on productivity should fade. Productivity growth in developed-markets economies has tended to revert to long-term norms after fast or slow periods. Two-sided risk thus surrounds our expectations. Continuation of the current environment would imply significantly slower potential growth rates. On the other hand, the possibility exists of a reacceleration in technological change after what appears to have been a fallow period over the past decade.
Our long-term emerging-markets forecasts have taken another step down. We expect annual growth to be slightly below 5 percent, with India running in the front of the pack and Russia among the stragglers. In rough terms, our country-by-country emerging-markets projections show a negative relationship between current per capita income and expected future growth, with poorer countries enjoying greater potential for catch-up. Emerging markets overall are feeling pressure from various global factors, however. With the globalization process largely complete, developing economies seemingly coming to the end of an extensive credit cycle, commodity price increases expected to remain muted and growth in developed markets below historical norms, the backdrop does not look particularly supportive.
We expect growth desynchronization to characterize the next several years. Credit dynamics will differ sharply across our forecast universe, with emerging-markets economies likely to enter a deleveraging cycle, whereas developed markets have mostly passed through that phase — at least within the private sector. We expect considerable policy divergence within developed markets, as the U.S. Federal Reserve begins to raise interest rates while other developed-markets central banks implement or consider additional easing measures. Despite the current prevalence of highly supportive monetary policy stances, our projections assume that inflation in developed markets will hew close to central bank targets.
Risk exists on both sides of this view. On the one hand, political or societal pressure for higher inflation could mount. Many developed-markets governments are carrying fairly heavy debt burdens. Faster nominal GDP growth — more easily achieved via higher inflation than stronger real growth — would help reduce indebtedness. Some analysts have suggested raising inflation targets as an indirect way of stimulating demand, although such calls do not appear to have picked up much mainstream support. The U.S. economy’s broadly satisfactory performance at least appears to have diminished the appeal of such ideas. (Alternatively, policies designed to raise the share of national income that goes to households, at the expense of corporate profits, could gain favor. Such efforts would likely boost unit labor costs, raising inflation rates.) On the other hand, although the Japanese descent into deflation remains poorly understood, developed markets in general will be following in Japan’s footsteps in some ways, especially in terms of population growth and aging societies. If these phenomena have played some role in lowering Japanese inflation, they may operate similarly elsewhere. Already, the slow-growth euro area is experiencing low inflation, although the hawkish nature of its central bank seems more obviously responsible.
We expect gradual progress in relatively high-inflation emerging-markets economies (Brazil, India, Turkey and Russia), with broadly sideways movement in some other emerging-markets countries. Macroeconomic stabilization arrived more recently in emerging markets than in developing markets and remains incomplete in several countries. Inflation expectations thus appear less stable and more susceptible to influence from currency depreciation, commodity price fluctuations and other factors. Moreover, some emerging-markets central banks enjoy less independence, at least formally, than most of their developed-markets counterparts. Still, we do not foresee a return to the very high inflation past — which, in Latin America in particular, continued into at least the 1990s.
Despite disappointing growth and occasional political stress in the past few years, very few emerging-markets governments have shown any sign of abandoning their commitment to broadly sustainable financial policies. For example, despite a deep recession, Brazil as of mid-2015 found itself engaged in simultaneous monetary and fiscal tightening in an effort to maintain stability and preserve creditworthiness. We therefore project single-digit inflation across emerging markets.
Michael Hood is a global strategist on the multiasset solutions team at J.P. Morgan Asset Management in New York.
Get more on macro.
