Weaker global growth impacting recovery

NIESR said markedly weaker growth in the US (which has largely been the result of severe winter weather) has been offset by stronger growth in Germany and Japan.

In India business confidence has been boosted by the election of a new government in May. China’s growth has stabilised close to the official target for 2014 of ‘about 7.5%’, thanks partly to new stimulus measures.

However, the Chinese financial system has seen a significant build-up of debt in recent years, and may be vulnerable to the ongoing shakeout in the property market.

The conflict in Iraq contributed to a limited and temporary upturn in global energy prices in June. The conflict in Ukraine has had significant effects on financial markets in Russia, but not in other major markets.

Inflation remains subdued globally, although it has moved closer to target in the US. In the Euro Area, it has fallen further on a 12-month basis and is below 1% in almost all member countries.

Despite recent ECB action, including negative official interest rates, deflation or very low inflation remain a key risk, and more extraordinary policy measures are likely to be needed.

NIESR said: “A key policy dilemma relates to the current stance of monetary policies in the advanced economies - which are unusually accommodative - and the prospects for their normalisation, given both relatively weak real activity and extremely buoyant financial markets.

“The risk of a destabilising asset market points in one direction, yet subdued inflation and high unemployment point in the other.

“At the current juncture – with inflationary pressures very limited in the advanced economies and deflationary risks apparent in some cases; substantial economic slack indicated by stagnant wages and high unemployment; and weak credit growth – we support the view of the major central banks that asset market developments have not been such as to call for an acceleration of the normalisation of monetary policy.

“There may, however, be a need for macro-prudential policies to be strengthened in some cases.”