Global growth to edge up in 2017

Global growth is likely to strengthen this year but uncertainty over geopolitical issues across the globe, elections in various European countries, Brexit negotiations and Donald Trump as President of the United States, pose risks to growth. Have a look at what is expected for the developed economies & the emerging markets in 2017.

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Global economy suffers another lackluster year in 2016

Global economic growth remained soft in 2016 for numerous reasons which vary by region. Generally, the culprits include structural adjustments in many countries, efforts to reduce overcapacity, recurring natural disasters, geopolitical events—such as Brexit, a coup d’état in Turkey and the ongoing civil war in Syria, among others—and heightened uncertainty related to the U.S. presidential election, as well as potential policy changes in the U.S. and a number of other major economies. Comprehensive data showed that the global economy grew 2.6% year-on-year in Q3 (at current exchange rates) and remains on track to have grown 2.5% overall in 2016, in line with FocusEconomics’ Consensus Forecast.

Ultra loose monetary policy in an effort to support household consumption and business investment. Eight years after the acute phase of the global financial crisis, the developed world is still using its central banks as a crutch. Throughout developed economies, interest rates are at, or close to, record lows and several are experimenting with avant-garde policies in the hope of stimulating domestic demand. Although it is reasonably clear that such policies are actually supporting economic growth—while introducing distortions in many asset markets—it is still hard to see how these economies will wean themselves off such support in the coming years. In the U.S., the scenario of higher interest rates continues to gain strength. At its last monetary policy meeting of 2016, the Fed announced its decision to raise interest rates, while the accompanying projection materials included an increase in the median estimate for rate hikes for 2017.

Of the world’s richest countries, the U.S. economy is undoubtedly in the best position, even though growth has fallen to a new normal of about 1.5%. President-elect Donald Trump has signaled a large “self-financed” fiscal stimulus, while ultimately backtracking on major disruptive policies related to trade or immigration. In Europe, although the latest economic indicators have been resilient, confidence in the Eurozone has continued to be undermined by political risks, the rise of national opt-outs from region-wide policy and the EU’s struggle to deal with Brexit. Such are the threats that Europe faces that questions such as the future of Greece, the region’s immigration crisis and difficulties in its banking sector are likely to be pushed to the margins for now. In the common currency area, economic growth has been plodding at around 1.5% in 2016. The fate of Japan is what European economies are keen to avoid. GDP growth in Japan remained lackluster in 2016, at around 0.5%. The economy continues to be constricted by a shrinking workforce, a rising old-age dependency ratio and tight immigration controls.

2016 proved to be a less uncertain year for most emerging economies than had seemed likely. Expectations of a U.S. tightening cycle in 2016 dissipated as the year progressed—the first rate hike was ultimately postponed until the end of the year—and the greenback rally stalled. This prompted many emerging market central banks to cut interest rates, boosting disposable income. Moreover, investors went back on the hunt for higher-yielding assets, capital flowed back into emerging markets and bond issuance likely reached a record high in 2016. Nonetheless, market participants’ bigger appetite for emerging-market debt was partly due to the absence of returns in developed economies, rather than a vote of confidence for riskier assets.

2017 spotlight on China, Brexit and the EU, and Trump’s administration

Geopolitical factors, elections in various European countries and the inauguration of Donald Trump as President of the United States will all contribute to a highly uncertain global context in 2017. Following an expected 2.5% increase in 2016, analysts surveyed by FocusEconomics expect that global economic growth will nevertheless experience a moderate improvement in 2017 to 2.9% and continue at around this rate in the following two years. The improvement projected in 2017 rests mainly on analysts’ assumptions that the global economy will continue to be bolstered by a continued recovery in developed economies—supported by still accommodative monetary policy in some economies and a renewed fiscal boost in others—and by stronger economic activity in most of the emerging world.

Our 2017 global growth forecast was left unchanged this month, which reflects balanced risks to the outlook. However, certain threats persist. Among these threats are potential stumbling blocks in the Brexit negotiations, the resurfacing of another China-meltdown episode like that seen in early 2016—with a consequent deceleration of its economy—and uncertainty related to the economic policies of the new Trump administration, which have the potential to stir things up drastically in the global economy. In terms of political risks, the wave of change seen in 2016 in a number of countries including the UKthe U.S. and Italy will continue unrelentingly in 2017 and uncertainly related to recent geopolitical events will persist.

Looking at individual countries, this month’s global outlook for 2017 showed an upward revision to growth prospects for major economies such as the Euro areaJapan and the U.S. The GDP growth forecast for the UK also improved from the previous month as concerns over negative spillovers from the Brexit vote continued to reduce.

Among major emerging economies, the economic outlook for BrazilRussia and India deteriorated from the previous month’s assessment, while China’s GDP growth projection remained stable. At a regional level, only growth prospects for Latin America and Sub-Saharan Africa deteriorated from the previous month’s Consensus.

Date: January 5, 2017


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