Major Economies Economic Outlook November 2016

All eyes on the U.S. presidential election

Major Economies: All eyes on the U.S. presidential election

Global growth remained tepid in the first half of 2016. A comprehensive estimate produced by FocusEconomics shows that the world’s GDP increased 2.4% year-on-year in Q2 2016, which followed a 2.5% rise in Q1. The global economy has been on an uninterrupted downward trend since Q2 2015 as the fall in commodities prices exacerbated macroeconomic imbalances and foreign currency dried up in most of the emerging market regions, particularly in the Commonwealth of Independent States, Latin Americathe Middle East and North Africa, as well as in Sub-Saharan Africa.

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Advanced economies managed to fare better in that period as they mostly resorted to expansionary monetary policies to jumpstart their faltering economies. Yet despite the initial successes, they too are now struggling to maintain growth momentum. There is a growing perception that monetary policy in several developed economies is reaching its limits and that more structural changes are needed to ensure a more sustained growth trajectory in the mid–term. Although a new round of fiscal stimulus is on the agenda, this will fuel fears about sovereign debt crises as public debt remains at very high levels in most developed nations.

On the political side, all eyes are on the outcome of the crucial 8 November presidential election in the United States. All major polls suggest that Hillary Clinton extended her lead after senior Republican Party members decided to withdraw their support for Donald Trump following a series of scandals. A possible triumph for Trump, however, still cannot be ruled out as the final outcome will be decided in some all-important battleground states. While Clinton is broadly expected to continue President Barack Obama’s policies, Trump’s proposed policies on global trade would take the U.S. in a very different, uncertain direction, since he envisages renegotiating the North American Free Trade Agreement (NAFTA) and dropping the U.S. from the Trans-Pacific Partnership agreement. He has also pledged to label China a currency manipulator and impose a 45% tariff on Chinese imports.

Our panel of global analysts projects that the world’s economic growth has expanded 2.5% in Q3 and that it will accelerate slightly to 2.6% in Q4. The global economy will benefit from loose monetary policy worldwide, more stable financial and exchange rate markets, a gradual  

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2016 growth outlook stable for second consecutive month 

Global growth prospects were stable this month for the second consecutive period as risks to the global economic outlook appear to be broadly balanced. Advanced economies continue to recover at a slow but steady pace, while economic conditions in most emerging market economies are gradually stabilizing. Bold monetary policy stimuli and renewed fiscal support in some countries promise to shore up economic growth in the coming quarters. The analysts we surveyed this month left their 2016 global growth forecast unchanged from the previous month at 2.5%. Next year, the Consensus view among analysts is that the global economy will pick up momentum and GDP will increase 2.9%. 

Among the major economies, this month’s global outlook for 2016 reflects unchanged GDP growth projections for CanadaJapan and the United States. Meanwhile, analysts raised the forecasts for the Euro area and the United Kingdom as concerns over negative spillovers from the Brexit vote have reduced.

Among emerging economies, the outlook for most regions—Eastern Europe, Latin America and the Middle East and North Africa—remained unchanged. Growth prospects for Asia ex-Japan improved as the region is benefiting from still robust dynamics in China, which expanded 6.7% in the first nine months of the year. On the contrary, analysts cut the 2016 growth forecast for Sub-Saharan Africa as the region continues to be threatened by mounting domestic challenges and the slow recovery in commodities prices.

UNITED STATES | Growth momentum improves ahead of presidential election

The U.S. economy seems to be back on track for robust growth in Q3, as monthly indicators strengthened in September following August’s overall cooldown. Dynamics in private consumption are intact, as evidenced by September’s rise in consumer confidence to a pre-crisis high and an uptick in retail sales. The industrial sector also regained some traction, with the ISM Manufacturing Index rebounding and industrial production returning to tepid growth. Ahead of November’s presidential elections, polls suggest that Hillary Clinton’s lead over Donald Trump has widened. A Clinton presidency would broadly involve a continuation of current economic policy while a victory of Trump would increase policy uncertainty and lead the U.S. into unchartered waters.

The world’s largest economy is set to pick up in the second half of this year, on the back of healthy private consumption and a bounce back in inventories. However, exports and fixed investment will continue to be restrained by subdued global demand and a strong U.S. dollar. Analysts expect GDP to increase 1.6% in 2016, which is unchanged from last month’s forecast. For 2017, our panel sees GDP growth at 2.1%. 

EURO AREA | Belgian region Wallonia blocks EU–Canada trade deal

Available data for Q3 suggest that the Eurozone’s economic recovery continued at a broadly steady pace, after GDP growth nearly halved in Q2. The unemployment rate remained steady for the fourth consecutive month in August and the composite PMI edged down in September.Meanwhile, industrial production rebounded in August and economic sentiment surged to the highest level seen since January in September, reaffirming that a sharp Brexit-induced shock to confidence has yet to materialize. All in all, the conditions that have fueled the recovery so far remain largely in place and growth is expected to proceed at a moderate pace in the coming quarters. On the political front, an EU summit in October failed to break the deadlock over a landmark free trade agreement between the EU and Canada. The agreement—which has been 7 years in the making—is now in jeopardy and serves to underscore the uphill task facing policymakers once Brexit negotiations begin.

Supportive monetary policy, an improving labor market and a less austere fiscal stance should support moderate growth this year and next. The FocusEconomics panel sees GDP expanding 1.6% this year, which is up 0.1 percentage points from last month’s forecast. Next year, growth is expected to inch down to 1.4%. 

JAPAN | Manufacturing activities remain robust despite strong yen 

The economy appears to have withstood the strengthening of the yen relatively well in Q3. Private consumption benefited from the sharp decline in the unemployment rate, which is at around a two-decade low. However, further gains in household spending will be limited by weak salary growth as an important part of the new employment gains are part-time jobs. Industrial activities gained steam in recent months, with the manufacturing PMI jumping to a nine-month high in October. Rumors are mounting that the prime minister could call a snap general election in January as he is seeking to expand his party leadership, which ends in 2018, in order to continue implementing his Abenomics policies.

Despite the Central Bank’s aggressive monetary policy and the government’s proactive fiscal stimulus, Japan is still struggling to jumpstart growth and revive inflation. While a strong yen remains the main short-term threat, the absence of deep structural reforms is limiting the country’s ability to lift long-term growth. Analysts see the economy growing 0.6% this year, which is unchanged from last month's projection. Next year, they see growth at 0.8%.

UNITED KINGDOM | Government intends to start Brexit process in Q1 2017

Growth continues to hold up well in the UK and the latest survey data show a further improvement in the manufacturing sector, with the PMI increasing in September. Moreover, consumer confidence recovered in the same month after the post-referendum downturn. Following nearly four months of little or no news regarding the formal Brexit timeline, in early October, Prime Minister Theresa May announced her intention to trigger Article 50 of the Lisbon Treaty before the end of March 2017 and also outlined plans to remove all European laws from the British statute book on the day of exit. Her speech suggested that the UK is heading for a “hard” Brexit, which would broadly mean no tariff-free access to the European market and restrictions on labor movement. Escalating concerns of a severe separation from the EU caused the pound to hit a historic low on 11 October.

Uncertainty stemming from the Brexit vote will continue to deter investment, but accommodative policy action taken by the BoE will soften the impact. This month, our panel upgraded the GDP forecast for the third consecutive time. The economy is expected to grow 1.8% in 2016, which is up 0.2 percentage points from last month’s estimate. For 2017, the panel projects that the economy will grow 0.7%.

INFLATION | Higher commodities prices push global inflation to multi-year highs in September

Global inflation resumed its upward trend in September and rose from August’s 2.8% to 3.1%, according to an estimate produced by FocusEconomics. September’s print represented the fastest rate in over two years. The upward trend mostly reflects the gradual increase in commodity prices.

Despite the increase in prices, disinflationary pressures are still strong in a number of advanced economies. Against this backdrop, most central banks are implementing largely accommodative monetary policies, which include, in some cases, ultra-low interest rates—even below zero—and quantitative easing programs. The use of such unconventional measures is expected to continue and further monetary policy easing is priced in by the markets, apart from for the U.S. The U.S. economy remains the outlier among advanced economies, with markets expecting the next rate hike there in December.

Taking these developments into account, our panel of analysts expects global inflation to continue rising and to average 3.5% in 2016, which is down 0.1 percentage points from last month's estimate. For 2017, the panel expects global inflation to rise further to 3.9%.

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Written by: Ricard Torné, Head of Economic Research

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