Major Economies: Global economy suffers another lackluster year in 2016
December 21, 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.
Against this backdrop, many central banks in the developed world have maintained exceptionally 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
In terms of commodity prices, on 30 November, crude oil prices jumped above USD 50 per barrel for the first time since October after OPEC sealed a deal to reduce production by 1.2 million barrels per day (mbpd) to about 32.5 mbpd for six months from the start of January. The markets reacted positively to the agreement, which includes an option to extend it until the end of 2017. In the first two weeks of December, crude oil prices surged to over USD 57 per barrel as the oil cartel also clinched a deal with non-OPEC countries, mainly Russia and other big crude exporters, to reduce their supply by 558,000 barrels a day. The deals amount to the first global supply pact since 2001, with producers battling to reverse a price crash that began in mid-2014 and caused oil prices to remain at record lows for two years.
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 UK, the 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 area, Japan 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 Brazil, Russia 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.
UNITED STATES | Signs of economic strength precede new administration
As the dust settles following the presidential election, economic data from the past month have been broadly positive. Steady gains in the labor market, including a post-recession drop in the unemployment rate in November, have made the headlines. Personal disposable income and household spending have remained fairly solid throughout 2016, boosted by buoyant consumer confidence, which jumped to a nine-year high in November. In terms of economic growth, after an extended soft growth patch characterized by five quarters of inventory correction, GDP growth in Q3, at 3.2%, was the fastest in two years. Meanwhile, positive prospects for oil prices and somewhat improving global conditions are supporting U.S. manufacturing activity, with the ISM index rising for a third consecutive month in November.
The signs of strength in the U.S. economy, as Donald Trump prepares to assume office, provide a strong contrast to the difficult context inherited by his predecessor, Barack Obama, who took office at the depths of the financial crisis. Trump has vowed to further boost U.S. growth to about 3.5% a year on average. However, Focus Economics analysts expect the boost that Trump can add to U.S. growth in 2017 and 2018 to be modest. They see GDP growth at 2.2% in 2017–up 0.1 percentage points from last month’s estimate–and inching up further to 2.3% in 2018.
EURO AREA | Region shows resilience overall in Q4
The Eurozone’s growth story continued unfazed in the third quarter, as a solid performance in the domestic economy drove a steady expansion. Households benefited from low inflation and an improving labor market, while the external sector and investment were the economy’s weak spots. Data for the final quarter point to a modest pick-up in momentum. The unemployment rate inched down in October and economic sentiment rose in November. In addition, the euro fell to the lowest level seen in years following the U.S. Federal Reserve’s decision to hike interest rates. The depreciated currency should bode well for the region’s exports, which have been hurt by subdued volumes of global trade.
The common-currency region’s growth outlook improved by 0.1 percentage points this month and the FocusEconomics panel sees GDP expanding 1.5% in 2017. A solid domestic economy should support the economy’s momentum, however, political risks are elevated in the face of a jam-packed election schedule next year. In 2018, the panel sees growth remaining stable at 1.5%.
JAPAN | Recovery remains in question
Economic activity has performed relatively well in Q4 as the weakening of the yen following Donald Trump’s victory in the November U.S. presidential election and a modest pick-up in global growth supported business confidence. On the downside, poor gains in wage growth continue to constrain private consumption. Although GDP expanded for the third consecutive quarter in Q3, the reading was revised down due to a worse-than-expected performance in private investment and a sharp destocking process. Moreover, a change in accounting standards and the base year for GDP contributed to the lower figure. The government unveiled the FY 2017 budget on 8 December, which is expected to be approved by the Cabinet on 22 December. The budget intends to rein in social security costs, boost the country’s workforce and encourage salary increases. Moreover, the government is set to approve a third supplementary budget for this year, amounting to USD 1.7 billion and focusing on earthquake reconstruction and military spending.
An accommodative monetary policy and a weaker yen are expected to boost growth next year. That said, ambitious economic and social reforms are needed to ensure a healthier and more sustainable growth trajectory. The main downside risk to growth next year will be increased protectionism under Trump’s administration. Analysts see the economy growing 0.9% next year, which is up 0.1 percentage points from last month's projection. For 2018, they see growth at 0.8%.
UNITED KINGDOM | The calm before the storm in 2017
The United Kingdom’s economy continues to hold up well. A complete set of data confirmed that GDP growth had decelerated marginally in the third quarter, but that growth remains robust compared to historical levels. The economy was supported by a rebound in exports while domestic demand disappointed. Economic activity is performing well as the smooth political transition following the resignation of former Prime Minister David Cameron and the accommodative stimulus of the Central Bank are keeping consumer and business confidence at reasonable levels. However, the depreciation of the pound, rising inflation and insufficient wage hikes risk eroding household consumption. Last month, Finance Minister Philip Hammond delivered the first budget statement after the referendum. In the next five years, the government projects higher borrowing and a slower fiscal consolidation compared to the previous budget.
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 0.2 percentage points and now expects the economy to expand 1.1%. For 2018, GDP growth is projected to accelerate to 1.3%.
INFLATION | Global inflation maintains upward trend
Global inflation continued to rise in November, edging up from 3.4% in October to 3.5%. November’s print marked the highest inflation rate in more than two years. Although the increase stemmed mainly from higher commodities prices, the cost of global raw materials remains low, given that most commodities markets remain oversupplied.
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 in the developed world is expected to continue next year and still loose monetary policies continue to be priced in by analysts, apart from for the U.S. economy. The U.S. Fed hiked interest rates for a second time since the financial crisis in December 2016. The Fed’s previous interest rate increase was in December 2015.
The FocusEconomics panel projects that global inflation will rise to 4.1% in 2017—which was revised up by 0.1 percentage points from last month’s Consensus—from an expected 3.5% in 2016, mainly due to higher energy prices in the wake of a recovery in crude oil prices. In 2018, analysts see global inflation moderating to 3.7%, as inflationary pressures in most of the emerging world will abate.
Written by: Ricardo Aceves, Senior Economist