8 December 2015
8 December 2015
World Outlook 2016: Managing with less liquidity
Of course, there is always the possibility that growth surprises to the
upside—although this is less likely because the economy has
underperformed policymakers' expectations over the past half-dozen years.
In terms of the upside risks to growth, the rapid appreciation of the dollar
may already reflect the expected divergence of central bank policies. In
turn, the pace of dollar appreciation may slow significantly over the
coming quarters, and could even reverse, resulting in less drag on
domestic production from the export sector than we currently assume.
• Another potential upside risk is the labor market. As the job market
continues to strengthen and the unemployment rate declines meaningfully
further, wage and income growth may rise faster than expected, providing
households with even more spending power than we envision. In this
scenario, the pace of Fed rate hikes would be significantly faster than that
implied by the current median FOMC projections.
• The final upside risk pertains to inflation. The aforementioned potential for
accelerating wage gains combined with a more dramatic recovery in
energy prices relative to our projection —possibly due to either a stronger
recovery in overseas growth or substantially less oil production —may push
headline inflation more quickly back toward the Fed's 2% target. Relative
to all of the aforementioned risks, this is perhaps the one that financial
markets are least prepared for.
Joseph A. LaVorgna,
Brett Ryan,
Aditya Bhave,
Page 22 IFigure 10: External balances &
:financial forecasts
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