Global economic activity stabilizes at the end of Q1
May 4, 2016
The global economy grew at its slowest pace in almost three years in Q1 as weaknesses that plagued emerging markets last year are far from abating and dynamics among developed countries remain weak. According to preliminary data that account for around 60% of the world’s nominal GDP, the global economy expanded 2.5% annually in Q1, which was below the 2.6% expansion tallied in Q4. Results of note in Q1 include stable year-on-year growth in the United States as income gains from low gasoline prices were offset by worsening investment and a strong dollar. Annual growth in the Eurozone was also stable likely due to robust domestic demand. Despite a challenging start to the year due to heightened volatility in global financial markets, bold policy support allowed China to only decelerate marginally.
The global economic scene remains dominated by developments in the oil market, monetary policy decisions and the possibility of a downturn in China’s economy. On 17 April, representatives from 16 oil-producing countries, including major producers Russia and Saudi Arabia, failed to reach an agreement to freeze oil production. Iran’s self-exclusion from the meeting led Saudi Arabia to refuse to be part of any agreement that would give the Shiite country any leeway on oil supply. While this situation threatened to send oil prices down sharply, oil disruptions in the Middle East and Nigeria, along with the U.S. Energy Information Administration’s (EIA) recent statement that U.S. crude production will fall in 2016 and 2017, shored up crude prices.
On the monetary front, while the United States’ Federal Reserve decided to hold rates in April, it also signaled an interest rate hike in the coming months due to a more stable global outlook. Against a backdrop of troubling signs, the Bank of Japan caught market analysts by surprise and refrained from firing a bazooka of monetary easing. That said, as the world’s third-largest economy remains in a soft patch, further fiscal and monetary stimulus are likely in the pipeline.
Finally, although China’s economy is gradually slowing, some green shoots appeared in the last couple months due to decisive policy support. While this situation bodes well for global growth in the short-term, from a somewhat longer-term perspective government-led credit growth poses some risks to debt sustainability in the country. FocusEconomics Consensus Forecast panelists expect the global economy to expand at Q1’s pace of 2.5% in Q2.
2016 global economic outlook stabilizes on more benign economic conditions
While economic uncertainty remains high, reduced volatility in global financial markets and the fact that policy measures in China took off at the end of Q1 helped to ease concerns about the health of the global economy, at least in the short term. The economic analysts we surveyed for this month’s Consensus Forecast panel maintained their 2016 global growth forecast at 2.7%. In 2017, the panel expects global growth to strengthen to 3.1%.
Unchanged growth prospects from last month's projections for global heavyweights China, the Eurozone and the United States were behind this month’s stabilization of the 2016 global outlook. Among other developed economies, Japan and the United Kingdom saw a deterioration of their growth prospects. In ex-Japan Asia, March’s encouraging economic data for China led growth prospects for the entire region to stabilize. Yet again, further downward revisions to the outlook for Brazil and Russia prompted analysts to downgrade their views for their respective regions. As a result of the ongoing uncertainty regarding commodity prices, analysts cut their growth prospects for the Middle East and North Africa and Sub-Saharan Africa regions.
UNITED STATES | Falling oil prices put a dent in economic activity in Q1
An advance estimate showed that the U.S. economy slowed at the outset of the year. In Q1, GDP increased at a seasonally adjusted annualized rate of 0.5%. The result came in below the 1.4% expansion registered in Q4 and reflected weak growth in domestic demand, which was dragged on by a contraction in fixed investment as energy businesses reacted to the renewed slump in oil prices at the beginning of the year. In addition, a still strong dollar at the start of the year continued to take a heavy toll on exports, which contracted for second consecutive period in Q1. Private consumption, the key engine of the economy, moderated but remained resilient in Q1 in spite of the heightened financial volatility registered in the first months of the year.
Despite ongoing challenges at home and abroad, the economy will continue to grow at a steady rate and it will be one of the major drivers of global growth this year. FocusEconomics panelists expect GDP to increase 2.0% in 2016, which is unchanged from last month’s forecast. For 2017, the panel sees GDP growth at 2.3%.
EURO AREA | Eurozone economy starts 2016 on high note
Despite experiencing a turbulent start to the year characterized by volatile financial markets and a slowdown in China, the Eurozone economy picked up pace in the first quarter. While a breakdown of GDP components is not yet available, leading indicators point to an ongoing recovery in domestic demand and unemployment fell in March. Despite the positive result, concerns over the pace of recovery amid external headwinds persist. The Composite PMI fell in April, reinforcing worries that the European Central Bank’s bazooka of policy measures announced in March may not be enough to stimulate growth in the bloc. Moreover, while low oil prices and a less austere fiscal position continue to act as tailwinds to consumption, political risks are rising amid the chance of Brexit, a still unsolved Greek crisis and growing Euroscepticism and nationalistic political parties.
The improved domestic economy should continue to fuel a steady if unimpressive expansion in 2016. Analysts did not change their forecast for the Eurozone’s economy this month and still expect GDP to grow 1.5% this year, mirroring 2015’s result. Next year, analysts see GDP growth inching up to 1.6%.
JAPAN | Challenging economic environment may prompt further policy stimulus
The economy ended 2015 on weak footing and more recent data suggest that it remains in a soft patch. A strengthening yen continues to weigh on exports and manufacturing activity, while consumer confidence remains subdued despite the fact that unemployment is at multi-year lows. Moreover, the earthquakes that hit Kumamoto in mid-April have disrupted major manufacturing companies’ supply chains. The region is a manufacturing hub for the automotive and semiconductor industries. In order to facilitate the recovery of the region, Prime Minister Shinzo Abe urged his government to compile an extra budget before 1 June. On top of that, analysts believe that the government will unveil a supplementary budget in fall of around JPY 5–10 trillion for fiscal year 2016 in an attempt to revive the economy.
Long-lasting Abenomics stimulus policies seem to be failing to rekindle growth. Despite the Central Bank’s bold support, the yen is strengthening due to growing global risk aversion, which is hurting the external sector. Moreover, the recent earthquakes in manufacturing-hub Kumamoto present new headwinds. FocusEconomics panelists forecast that the economy will grow 0.6% this year, which is down 0.1 percentage points from last month's projection. Next year, the panel sees GDP growth remaining stable at 0.6%.
INFLATION | Global inflation slows in March
According to preliminary data, global inflation inched down from February’s 3.0% to 2.8% in March. February’s result had marked the fastest rate since October 2014. Despite the upward trend observed in recent months, inflationary pressures remain contained due to the low oil price environment. Moreover, less volatility in financial markets is easing pressure on some currencies in emerging markets.
Taking these developments into account, our panel of analysts expects that global inflation will be 3.1% in 2016, which is unchanged from last month’s estimate. Panelists participating in our survey see inflation in 2017 rising slightly to 3.4%.
Written by: Ricard Torné, Senior Economist
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