World Economic Prospects.

Overview: What do falling bond yields tell us? US bond yields have fallen considerably since the start of the year - by about 40bp for 10-year bonds - a development apparently at odds with expectations of stronger US growth this year and next and with the process of Fed 'tapering'., There are several possible explanations, some of which tie in with our global forecast story. Recent US growth data have been largely disappointing, with GDP barely expanding in Q1. This month sees our forecast for growth in 2014 cut to 2.4% from 2.9%., But we expect a solid rebound in growth from Q2, in line with most observers. This suggests other factors are at work - including factors outside the US., First, the US bond market seems to have taken a 'sell on the rumour, buy on the fact' attitude to tapering. This may reflect a view that tapering will lead to falls in prices of risky assets, and also perhaps indicates Fed success in managing its forward guidance. Notably, one-year interest rates have drifted lower since Q3 2013: the market has pushed away expectations of early Fed rate hikes., Second, long-term inflation expectations are stable or declining in most advanced economies. US expectations have hovered around 2% in recent months (down from 2.5% a year ago) while inflation expectations in the Eurozone have declined notably: 10-year breakeven inflation in France is just 1.1%., Our growth forecast in the Eurozone has edged up in recent months but remains low, implying the negative output gap will remain wide and disinflationary pressures continue. And emerging markets are set to add to the global negative output gap. PMI surveys show continued weak growth and this month sees some further GDP forecast downgrades in the BRICs., Taken together, these factors suggest that bond markets are pricing modest economic growth and low inflation, broadly in line with our forecast. But there are significant nodes of downside risk in the Eurozone and the Chinese financial sector. The ECB seems likely to act next month but how decisive it will be is unclear. Whether the authorities in China can contain financial sector risks also remains an open question. [ABSTRACT FROM AUTHOR]