The following is an edited transcript of the first part of a recent interview on the global outlook. The second and third sections of the interview, discussing inflation and markets, will be posted later this week.

How has the global economy performed so far this year?

Better than might have been expected given the credit crisis and soaring commodity prices. Globally, annual industrial output growth has fallen from 5% last year to 3% in mid-2008 (first chart). So far at least, weakness in the G7 economies has been offset by continued strength in emerging markets. Output growth in the seven largest emerging economies – the E7 – was still running at 9% in mid-2008.

What is your forecast?

I expect global industrial output growth to slow further to 1-2% over coming months as G7 numbers move into negative territory and emerging economies moderate. However, this would still represent a relatively moderate downswing by historical standards – much less severe than 2001, for example. And I think growth will start to recover in late 2008 and into early 2009.

What factors will support global activity?

The US economy is probably past its low point. Last year our probability indicator suggested an evens chance of a recession (second chart). Now it’s saying the risks have receded. The change mainly reflects the Fed’s aggressive policy easing in late 2007 and early 2008. The impact of this policy change should be feeding in by late this year.

What will drive any US recovery?

The stocks cycle – initially at least. Companies have cut stocks to very low levels (third chart), which has been a major drag on the economy. I doubt they will fall further. Even if they simply stabilise, there will be a significant positive impact on growth.

How will that affect other economies?

As US firms stop cutting stocks, import demand will rise, helping to support foreign activity. There is a significant positive correlation between global industrial output growth and the US stocks cycle (fourth chart).

Could high oil prices lead to a harder economic landing?

My forecast assumes they stabilise below the recent peak. The supply / demand balance seems to be shifting as the decline in OECD consumption accelerates. Weaker OECD demand should accommodate rising emerging world consumption, barring any supply shock.

What about emerging economies?

The indicators suggest only a modest slowdown. One reason is that external finances remain strong. Emerging countries continue to pile up foreign exchange reserves. This tends to be associated with loose domestic monetary conditions, which in turn support domestic demand (fifth chart). My forecast assumes E7 industrial output growth eases from 9% to 6-7% by early 2009.

What is the main risk to your forecast?

European weakness. Europe seems to be about a year behind the US in the cycle and is turning down even as the US finds it feet. Recession risk is rising – not just in the UK but in Euroland too. Unlike the US, there is no policy stimulus in the pipeline. Globally, the risk is that a recession in Europe outweighs improvement in the US and emerging market resilience.