Major Economies: Political events take center stage; global growth remains strong
June 28, 2017
The global economy is ready to post another strong outturn in Q2 on the back of healthy economic dynamics in both emerging and advanced economies. Analysts polled for this month’s Consensus Forecast expect that the global economy will grow 3.0% annually in Q2, matching the result in Q1. The United States is expected to lead the pack following the disappointing result in Q1, while the Euro area and Japan are seen expanding at relatively decent rates. Advanced economies are benefiting from still accommodative monetary policy conditions and tighter labor markets, and the recent decline in energy prices is putting money into consumer’s pockets. Despite some signs of stabilization, global demand remains strong, propelling the external sector.
Although emerging markets are also benefiting from strong global growth, wavering commodity prices and geopolitical threats continue to cloud those countries’ economic outlooks. Moreover, they are feeling the pain of long-lasting economic imbalances. While some economies are still far from addressing these structural weaknesses, curtailing their potential growth, the countries that have started with the adjustment are facing short-term economic pain in the form of weaker growth and, in some cases, civil unrest.
Head on over to our Major economies page for more recent economic news on the region.
The Gulf nosedived into the worst political crisis in years after several countries, led by Saudi Arabia, decided to sever diplomatic ties with Qatar abruptly in early June. They also closed all borders with the country and imposed trade and travel bans. Saudi Arabia and its allies have issued 13 demands for Qatar to end the political and trade blockade, including the shutdown of broadcaster Al-Jazeera and a scale down in its ties with Iran. The island has until 3 July to heed the ultimatum, but the Qatari government has dismissed the document. The U.S. role in the crisis has been controversial as President Donald Trump endorsed the blockade, while some U.S. officials encouraged further dialog. At this stage it is difficult to assess the impact of the crisis in the global economy, but it certainly represents an escalation between the region’s leading powers Iran and Saudi Arabia, with the support of the United States. Against this backdrop, the Iran nuclear deal has been placed in the line of fire, while the consequences of this clash could spill over into other regional conflicts.
A political sweet spot has materialized in the European Union in the aftermath of the elections in France and the United Kingdom. President Emmanuel Macron's victory in the regional French elections will allow him to implement his economic reform agenda while cementing political ties in the Euro area, reinforcing the German-French axis in particular. Moreover, UK Prime Minister Theresa May’s defeat in the “Brexit election” has softened the tone of Brexit negations. In fact, on 19 June, the UK delegation accepted the EU’s proposal of first discussing citizens’ rights and the exit bill instead of first focusing on a potential trade deal in order to start talks.
In the United States, economic activity is regaining momentum in Q2 as private consumption is benefiting from a 16-year-low unemployment rate and soft inflation. On the fiscal side, the much-trumpeted budget stimulus plan has failed to materialize, raising concerns about the scope and timing of the initiative. At its 13–14 June meeting, the Federal Reserve announced the widely-anticipated third rate hike, although analysts were surprised by the Board’s rather hawkish tone given that inflation has been rather weak of late. The Committee also provided further details on its plan to shrink the size of its massive USD 4.5 trillion balance sheet. Apart from the Fed, no major central bank is expected to tighten the reins this year as it could hurt their respective country’s economic recovery, and low inflation is taking pressure off policymakers to normalize their monetary policies.
2017 global outlook stable on improving economic and political landscape
Global growth remains on track as some developments with the potential to jeopardize the economic recovery failed to materialize. Trump’s much-dreaded protectionist agenda has not yet come to fruition and global trade is in good health. The European Union is enjoying political stability not seen in years and the economy is in smooth sailing. Although growth in China has decelerated, it is expected to remain robust throughout this year, while authorities will continue with the implementation of economic reforms and initiatives to deleverage the financial sector. Moreover, monetary policies remain largely accommodative, with the exception of the U.S. On a negative note, uncertainty is high on Trump’s fiscal measures, while rising political uncertainty in Brazil and the Persian Gulf highlights the fragility of the recovery.
Analysts surveyed by FocusEconomics see global economic growth at 3.0% in 2017, unchanged for the second consecutive month. For 2018, our panel foresees a 3.1% expansion as growth will accelerate in the United States and in the majority of emerging economies.
Taking a closer look at individual countries, this year’s GDP growth forecasts were held stable for the United States, while projections for the Canada, Euro area and Japan economies experienced an upgrade. Only the United Kingdom, which is feeling the pinch of a looming Brexit, saw its projection cut.
Among the emerging economies, fears of a sharp slowdown in China have almost disappeared, despite a moderation in Q2, and this is supporting the outlook for Asia ex-Japan. The ongoing economic recovery in Russia and resilient growth in the Eurozone will prompt a marked strengthening in dynamics in Eastern Europe this year. Although the Latin American economy will return to growth in 2017, the outlook is worsening on the back of ongoing political turmoil in Braziland still-high domestic vulnerabilities across many economies in the region. Growth prospects for Sub-Saharan Africa and the Middle East and North Africa regions are being kept subdued due to uncertainty in the commodity markets, coupled with large macroeconomic imbalances and geopolitical risks.
UNITED STATES | Economy set to strengthen in Q2 but political wrangling poses downside risk for 2017
The economy remains on track to expand at a faster clip in Q2 after a bleak Q1 performance. The ISM manufacturing index firmed up in May following two consecutive months of decline thanks to a faster pace of job creation and resilient output growth. In addition, the unemployment rate inched down to a 16-year low in May, further shoring up households’ disposable income at a time of meager wage growth and tightening financial conditions. Indeed, although retail sales surprised on the downside in May despite buoyant consumer sentiment and a robust labor market, upward revisions to the previous months more than made up for May’s miss.
The outlook for this year remains bright on account of a solid job market, a relatively healthy housing market and a notable turnaround in business investment growth. Nonetheless, persistent political wrangling in Washington continues to foment doubts about the administration’s ability to roll out growth-inducing policies later this year. Analysts expect the economy to grow 2.2% this year, unchanged from last month’s projection, and see it picking up slightly to 2.4% in 2018.
EURO AREA | Political stability and strong economic indicators propel upbeat economic sentiment
The economic picture is becoming brighter in the Eurozone. Complete data revealed that GDP growth was stronger than previously estimated in the first quarter and recorded the best result in two years. Private consumption grew healthily thanks to an improving labor market and looser fiscal policies, while the external sector also improved. Moreover, growth is broadening across economies and the common-currency bloc is shaking off political concerns. In June, Greece’s creditors agreed to unlock over EUR 8 billion in financing for the country, removing a possible summer default on loan repayments and newly-elected French President Emmanuel Macron won a decisive mandate in legislative elections, giving him the ability to govern effectively. Data for Q2 is also positive: economic sentiment hovered at a multi-year high in May and the unemployment rate fell in April.
Accommodative financial conditions, falling unemployment and a brighter global backdrop will provide tailwinds to growth this year. The FocusEconomics panel sees a solid 1.8% expansion in 2017, up 0.1 percentage points from last month’s estimate. For 2018, growth is seen broadly steady at 1.7%.
JAPAN | GDP gains less than initially reported in Q1
It’s smooth sailing for the Japanese economy again in Q2, although revised data for Q1 revealed a weaker performance than initially reported. Exports expanded at the fastest pace in more than two years in May, signaling robust global demand. Healthy shipments of Japanese goods are having positive reverberations across the economy, with growth in industrial production hitting a nearly-six-year high in April. Despite May’s strong export reading, the trade balance swung to a deficit in May as imports soared in the same month, underlining the strength of Japan’s growth momentum. Moreover, wages appear to have entered onto a sustained growth path, which is expected to foster private consumption. In the political arena, Prime Minister Shinzo Abe's approval ratings are plunging amid claims the he used his influence to benefit a friend’s business.
Strong global demand and a weak currency are propelling economic activity. Japan’s external-sector-led recovery, however, could be threatened by a sharp appreciation of the yen and an economic slowdown materializing in China. Analysts see the economy growing 1.3% this year, which is up 0.1 percentage points from last month's projection. For 2018, they see growth at 1.0%.
UNITED KINGDOM | “Brexit election” strengthens the case for a softer exit
Prime Minister Theresa May’s “Brexit election” backfired as her Conservative Party lost the parliamentary majority in the 8 June vote. Although the Tories managed to build a coalition government with the Democratic Unionist Party, the result represents a serious setback for May’s hard Brexit stance and it will likely lead to a softer approach. In this regard, at the first day of the Brexit talks on 19 June, the UK apparently capitulated and accepted the EU’s agenda of first discussing citizens’ rights and the “exit bill” before negotiating any trade accord. Meanwhile, the economy is continuing to face the headwinds of the entangled political situation, following Q1’s disappointing performance. In May, house prices slowed further, while consumer sentiment remained firmly entrenched into negative territory. Although the unemployment rate stood at a multi-year low in April, real wages declined in the February-April period, casting a long shadow on the UK’s economic outlook.
The weak government resulting from the June election has added to an already uncertain economic outlook as the country is sailing the uncharted Brexit waters. As a result, uncertainty is deterring investment and consumers are feeling the pinch of rising inflation. The Bank of England’s (BoE) ultra-loose monetary policy stance and healthy global demand, however, will soften the slowdown. Our panelists are forecasting 1.6% growth for this year, which is down 0.1 percentage points from last month’s forecast. For 2018, growth is projected to fall to 1.3%.
INFLATION | Global inflation declines in May
Lower energy prices and more stable economic conditions among developing economies are exerting downward pressure on inflation. Against this backdrop, global inflation declined from April’s 3.6% to 3.4% in May, which represented the lowest rate in six months. Among the advanced economies, inflation decelerated in the Eurozone and the United States, while price pressures intensified in the United Kingdom on the back of a weaker sterling. Inflation is decelerating in most emerging-market economies as a result of lower food prices and more stable foreign exchange markets. The most notable exception is China where prices are recovering following the slump observed in the first months of the year.
Although inflation is expected to accelerate in the coming months due to reduced slack and higher commodity prices, risks are now titled to the downside. The FocusEconomics panel projects that global inflation will rise to 4.7% in 2017, which is down 0.1 percentage points from last month’s Consensus projections. This month’s downgrade to the global inflation outlook for 2017 mostly reflects lower estimates for China, the Euro area, India and the United States. In 2018, analysts see global inflation moderating to 4.4%.
Written by: Ricard Torné, Head of Economic Research
Written by: Ricard Torné, Head of Economic Research