Considerable downside risks to global growth outlook

There are still considerable downside risks to the outlook which could undermine growth even further. Global growth could lose even more momentum, dragged further down by a potentially weaker performance in China which would exacerbate the softer conditions in many emerging market economies that depend upon export markets throughout the Asia-Pacific region.

Commodity-producing nations remain at risk of further weakness as adjustments needed to correct oversupplies in most resource sectors result in reduced capital expenditures and output growth.

"The very moderate recovery in the euro zone is susceptible to unexpected developments which could undermine the economic progress to date. The region's industrial activity will be challenged by the reduced demand for exports destined for China, with German auto production also affected by the scandal surrounding diesel engine emissions. Budgets will be stretched to deal with the intensifying migrant issue affecting most of the continent", says Scotia Bank.

Escalating risk in financial markets, slumping equity prices, sharply increasing volatility metrics and widening credit spreads, compounds the uncertain outlook and has the potential to further undermine business confidence and investment.

"USD has strengthened in response to the relative outperformance of the U.S. economy, the expected widening in short-term interest rate differentials between the U.S. and other more inflation-prone economies, and safe-haven capital inflows from less financially robust emerging market economies. A stronger USD could add to the drag on the U.S. economy from a further erosion in net trade and U.S. earnings derived from foreign sources", states Scotia Bank.

Slower global growth coupled with the ongoing weakness in commodity prices increases the risk of a deflationary shock that overwhelms the cyclical rebound in prices in the U.S. and the U.K. where capacity constraints and wage pressures are showing some signs of emerging.

Increasing event risk, as evidenced by the expanding list of geopolitical and weather-related issues, has the potential to aggravate confidence and defer spending even more.