Major Economies: The world ends 2016 on a strong footing
February 1, 2017
The global economy accelerated in the final quarter of 2016 due to a combination of improved conditions in emerging market countries and stronger growth in developed economies. It expanded 2.7% year-on-year in Q4, above the 2.5% rise in Q3 and the strongest print in the full year. Q4’s strong reading brought total growth for 2016 to 2.6%, a notch above the 2.5% previously forecast but well below 2015’s 3.0%. Despite the deceleration in 2016, the global economy managed to navigate its way through troubled waters and perform at a still decent rate. Geopolitical risks remained high in 2016 as a result of the Brexit vote, a still-inflamed Middle East, the impeachment of Dilma Rousseff in Brazil and the election of Donald Trump in the U.S. presidential elections, among others. Challenging weather conditions, led by a severe El Niño weather effect, seriously damaged the agricultural sector in some countries, particularly in emerging markets.
This year, many developed economies are still benefiting from accommodative monetary policies due to the low global inflation environment. While cheap money is buttressing business and consumer confidence, ultra-low interest rates cannot last forever. This situation is raising doubts about how authorities will stimulate these economies once inflation starts to take off. The main exception is the United States, where an already well-performing economy could receive a further boost if a new stimulus plan is approved by President Trump. This situation could force the Fed to accelerate the pace of its monetary policy tightening, which would reverberate across the world mostly via rising volatility in the financial and exchange rate markets.
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Economic dynamics among developing economies are gradually improving following some quarters of sluggish growth. The increase in commodity prices that started in the final quarter of 2016 is good news for the majority of emerging market nations. That said, the recovery in raw material costs is expected to be limited, thereby hampering the possibility of a sharp and sustained recovery. Against this backdrop, many governments will have to continue dealing with tough fiscal positions and the need for structural reforms appears inevitable.
Nevertheless, the biggest risk to the global outlook is a rise in protectionism, which could put an end to the era of multinational trade agreements that has defined global economics in recent decades. In this regard, on 23 January, President Trump decided to pull the United States out of the Trans-Pacific Partnership (TPP), a massive trade deal that included around 40% of the world’s GDP and was a pivotal element of the Obama administration’s strategy to provide a counterweight to China’s rising role in Asia In yet another example of Trump’s vision of international economics, his administration declared that the U.S. is considering imposing a 20% tariff on Mexican imports to finance the border wall between the two countries. All eyes are now on the measures he could announce against China, which enjoys a healthy trade surplus with the U.S. If Trump imposes any significant trade barrier against China, it will certainly lead to a trade war between the world’s two largest economies.
Mounting global uncertainties threaten 2017 recovery
Although the global economy will accelerate this year, a series of events are threatening to endanger the recovery. President Trump is fulfilling his campaign promises and his protectionist agenda is slowly taking shape, with his withdrawal of the U.S. from the TPP and his threats to impose import tariffs. If he finally succeeds in restricting international trade, this could seriously harm global growth. Export-driven nations such as China, Japan and Mexico would be the worst hit by Trump’s anti-trade policies and this situation could exacerbate domestic imbalances. Moreover, political uncertainty is rising in the European Union. Negotiations between the EU and UK on a “hard” Brexit and this year’s election cycles in key countries have the potential to hamper the EU’s currently healthy growth momentum.
Following a 2.6% increase in 2016, analysts surveyed by FocusEconomics expect that global economic growth will accelerate to 2.9% in 2017. The faster growth in 2017 rests mainly on analysts’ assumptions that the global economy will continue to be bolstered by a recovery in developed economies, which will benefit from largely accommodative monetary policies and, in some countries, renewed fiscal stimulus. Growth in the emerging world will also pick up pace as some key economies are slowly recovering from last year’s dismal performance.
Looking at individual countries, this month’s global outlook for 2017 showed an upward revision to growth prospects for major economies such as Japan and the United Kingdom. The GDP growth forecast for the U.S. also improved from last month on hopes that the new administration will unveil a fiscal stimulus plan and will pursue pro-business policy changes.
Among the major emerging economies, the economic outlook for Brazil and India deteriorated from last month’s assessment, while China’s GDP growth projection remained stable following Q4’s surprisingly strong result. At a regional level, growth prospects for Eastern Europe, Latin America and the Middle East and North Africa deteriorated from last month’s Consensus, while those for ex-Japan Asia and Sub-Saharan Africa were stable.
UNITED STATES | Fresh fiscal stimulus in the cards
New President Donald Trump’s economic approach is starting to take shape. In a flurry of executive orders in the first days after his inauguration, Trump has abided by many of his campaign pledges, which is raising hopes that his fiscal stimulus plan is also in the pipeline. The plan, which envisages sizeable tax cuts and increased government infrastructure outlays, is aimed at buttressing the country’s already well-performing economy, but runs the risk of overheating it in a context of near full employment and rising inflation. According to a first estimate, GDP expanded at a seasonally-adjusted annualized rate of 1.9% in the fourth quarter, which, despite decelerating notably from the 3.2% reading observed in the previous quarter, still contributed to a solid performance of the economy in the second half of the year. Household spending was once again the main engine of growth on the back of accelerating wage growth, near full employment and multi-year-high consumer confidence.
The U.S. economy continues to hum along at a respectable pace. Homebuilding and manufacturing are both retaining upward momentum in early 2017, signs of overheating in the U.S. labor market are still weak and investment should pick up pace once policy uncertainty dissipates and investors capitalize on higher oil prices. FocusEconomics analysts expect GDP growth at 2.3% in 2017—up 0.1 percentage points from last month’s estimate—and 2.4% in 2018.
EURO AREA | Momentum picks up despite political uncertainty
Economic momentum is gathering steam in the Eurozone, as the economy continues to be unfazed by political uncertainty and external headwinds. Monthly data suggest that the economy ended 2016 on a high note: industrial production growth rose and the unemployment rate remained at a multi-year low in November. Leading indicators also point to a bright start of the year for 2017: economic sentiment rose to a multi-year high in January and the PMI suggested that business activity remains firm. In addition, the euro’s recent depreciation should provide impetus to export growth in the coming months
The Eurozone’s outlook for 2017 is surprisingly bright given the bloc’s jam-packed election cycle and uncertainties over the impact of new President Donald Trump in the U.S. While reform momentum is likely to slow this year as elections take place in key economies and Brussels focuses on Brexit negotiations, an improving labor market and rising exports should fuel a healthy 1.5% expansion. The Eurozone’s forecast was unchanged from last month’s publication. In 2018, growth is seen remaining steady at 1.5%.
JAPAN | Trump’s anti-trade policies threaten Japan’s nascent recovery
The economy ended 2016 on a strong footing. The weakening of the yen and a pickup in global trade are propelling exports, which, in December, recorded their first positive reading in fifteen months. The external sector’s healthy growth momentum has started to feed into the real economy, with industrial production and retail sales expanding markedly in November. The withdrawal of the U.S. from the Trans-Pacific Partnership (TPP) represents a major blow to Prime Minister Shinzo Abe’s strategy to cement ties between the two countries in an attempt to provide a counterweight to a rising China and jumpstart the economy by fostering the external sector. While U.S. President Donald Trump is seeking a bilateral trade agreement with Japan, he has also stated that the current trade deficit with Japan is “not fair”, raising fears that he could impose trade barriers.
The economic recovery will gain traction this year on the back of rising wages and improving business sentiment. A weak yen and an accommodative monetary policy will also support growth. The main downside risks to growth this year are related to an increase in protectionism under Trump’s administration. Analysts see the economy growing 1.0% this year, which is up 0.1 percentage points from last month's projection. For 2018, they see growth at 0.8%.
UNITED KINGDOM | May heads for “hard” Brexit
The UK economy defied fears of a predicted slowdown following the Brexit vote when GDP recorded another quarter of strong growth in Q4 2016. The increase was mainly driven by the manufacturing and service sectors, particularly the consumer-focused industries such as retail sales and travel agency services. Loose monetary and fiscal policies, coupled with the depreciation of the pound sterling, supported the economy in the second half of 2016. Continued robust growth makes life slightly easier for Prime Minister Theresa May, who earlier this month revealed the government’s proposed plan for Britain’s exit from the EU, signaling a resolutely “hard” Brexit. The government will seek to take back full control of the country’s borders at the expense of losing access to the single market. All eyes are now on Parliament, which must vote in favor of the relevant Bill presented on 26 January in order for Article 50 to be triggered.
Political uncertainty stemming from the referendum will continue to deter investment. Growth is expected to decelerate in 2017 amid a slowdown in real household income growth. However, accommodative policy action taken by the BoE will soften the impact. This month, our panel upgraded its 2017 GDP forecast by 0.1 percentage points and now expects the economy to expand 1.2%. For 2018, GDP growth is projected to accelerate to 1.3%.
INFLATION | Global inflation ends 2016 at over three-year high
The upward trend in global inflation remained intact in December, rising from 3.3% in November to 3.7%. December’s print marked the highest inflation rate in more than three years. The increase stemmed mainly from higher commodity prices, which caused inflation to hit multi-year highs in many major economies. Inflation rose to the highest level seen since May 2014 in the U.S. and to an over two-year high in the Eurozone. Despite higher commodity prices, the cost of raw materials globally remains subdued in a historical context.
Despite the recent pickup in global prices, inflation remains relatively low in most regions, giving central banks leeway to keep accommodative monetary policies, which include the use of unconventional measures in some developed countries. That said, this situation could reverse this year if the United States decides to accelerate its tightening cycle, as a number of central banks, mostly in the developing world, would follow suit in an attempt to avert a sharp depreciation of their currencies and tame market volatility.
Global inflation came in at 3.4% in 2016, the highest result since 2012. While low commodity prices kept inflation contained in advanced economies, economic imbalances fueled price pressures in emerging markets. This year, the FocusEconomics panel projects that global inflation will rise to 4.4% in 2017, which was revised up by 0.3 percentage points from last month’s Consensus. The rise is mainly due to higher energy prices in the wake of a recovery in crude oil prices. In 2018, analysts see global inflation moderating slightly to 4.0%.
Written by: Ricard Torné, Head of Economic Research