Overall global growth in the next three to five years will be moderate and divergent on a country basis and that risks to global growth are skewed to the downside, according to Towers Watson annual Secular Outlook.
The report says the US and Germany have reasonable medium-term growth drivers, but that the UK remains heavily indebted and sensitive to interest rate rises.
The rest of Europe and Japan are in a difficult economic environment and are in danger of remaining in a negative situation of low interest rates, weak growth and low inflation according to the company.
The report says that a combination of gradual but significant currency appreciation and rapid increases in wages means that Chinese labour is now materially less competitive than it was five years ago and that China will grow at a much slower pace over the next decade than it did over the past ten years.
“Given the depth of the previous contraction in many economies, the large policy stimulus required to offset it and the subsequent slow recovery, policymakers are likely to remain under pressure to support growth in the next few years," says Robert Brown, chairman of the Global Investment Committee at Towers Watson.
"In the absence of a negative event, our base case is for continued but modest recovery and an unusually extended economic cycle. However, all will not remain equal and on-going indebtedness pressures in much of the developed world and some of the emerging world exposes the global economy to the continued prospect of negative shocks.”
In the publication the company reiterated its rating of moderately unattractive on investment grade credit which it downgraded prior to recent spread widening.
Despite this, it advises investors to re-visit credit exposures and decide whether alternative asset mixes are preferred in an environment where economic risks are growing and skewed to the downside.
Brown notes that if investors want to take advantage of this view they could replace exposure to investment grade credit with a blend of equities and gilts that offered a similar level of long-term return.
"This could be implemented gradually by not buying more credit from inflows, rebalancing or de-risking. Or they could change the sectors of the credit market to which they are exposed, with the aim of finding those that offer more value.”
In the report, Towers Watson states that it is not immediately clear whether investors should be worrying about high or low inflation over the next three to five years. It says any pent-up upside inflation from extraordinary monetary policy may be unleashed if private sector credit creation increases sharply, whereas the data shows a worrying disinflationary inertia.
“As some of the world’s largest central banks begin to emerge from a grand-scale monetary and fiscal experiment after the financial crisis, now is probably the time to worry about more extreme inflation outcomes - something we term ‘tailflation’," says Brown.
"Our view is that inflation risks lie to the downside over the medium-term, as on-going deleveraging pressures and significant – although sometimes disguised – economic slack continue to limit the impact of increases to the monetary base.”
The company is also urging long-term investors to grapple with unknowables that can affect their investment portfolios through upside and down-side risks.
It identifies a number of new technologies, such as Bio, Nano and Clean technologies and Big Data, as having the potential to enhance productivity on a global scale creating a highly positive scenario for many asset class returns.
“Clearly technological change is not without its downside possibilities, significant dislocations in industrial structure and labor markets can emerge as new technology is employed, leading to increases in unemployment. However, eventually re-tooling and re-skilling enables technology-led productivity improvements to dominate," adds Brown.