Major Economies: Global growth set to recover in H2
A more complete set of data corroborates that the global economy grew at its slowest pace in almost three years in Q1 due to rising volatility at the outset of the year. Global GDP expanded 2.5% annually, which matched last month’s estimate and was a notch below the 2.6% rise tallied in Q4. Although growth remained weak in the first three months of 2016, a more detailed analysis suggests that global economic activity is bottoming out and that it will likely accelerate in the second half of the year. Met the why particular Consensus Forecast panelists expect the global economy to expand at Q1’s pace of 2.5% in Q2 before accelerating to a 2.6% rise in Q3 and 2.8% increase in Q4.
Domestic demand is fueling growth in the Euro area, while the economic recovery in the United States remains firm on the back of resilient private consumption. As a result of more benign global financial conditions and resilient growth at home, the Federal Reserve is adopting a more hawkish tone and some Fed members are eyeing a summer rate hike. While China’s authorities have started to unwind its policy stimulus amid fears that credit-fueled growth could exacerbate economic imbalances, the strong rebound in economic data observed at the end of Q1 signals that the government will not allow the economy to slow sharply. In Japan, a still-weak economy will likely force the government and the Central Bank to deliver further fiscal and monetary easing in the coming months. Moreover, the steady increase in commodity prices that has been observed since mid-January provides some relief for some battered emerging-market countries.
Along with tighter financial conditions associated to a possible rate hike in the United States, the possibility of the United Kingdom leaving the Eurozone poses serious risks to the global outlook. A “leaving” vote in the upcoming 23 June referendum would have unpredictable economic consequences and, amid a context of rising Eurosceptic forces, it could represent the first step toward the disintegration of the Eurozone.
Improving economic conditions led 2016 global economic outlook to stabilize
Although economic and political uncertainty remains high, stronger-than-expected growth in key developed countries, gradually increasing commodity prices and Chinese authorities’ commitment to step in should growth decelerate sharply have eased concerns about the evolution of the global economy, at least for the coming months. The economic analysts we surveyed for this month’s Consensus Forecast panel maintained their 2016 global growth forecast unchanged for the second consecutive period at 2.7%. In 2017, the panel expects the global economy to strengthen to a 3.0% increase.
Unchanged growth prospects for global titans China and the Eurozone were behind this month’s stabilization of the 2016 global outlook. Among other developed economies, analysts kept the United Kingdom’s growth outlook unchanged, while projections for the world’s largest economy, the United States were revised down, as was that of Japan. Policy support in China continues to shore up the economic outlook in ex-Japan Asia, while a further downward revision to the growth estimate for Brazil prompted analysts to downgrade their outlook on the entire region. Russia’s economy is expected to benefit from the gradual increase in commodities prices, which, in turn, will positively reverberate around Eastern Europe. While the recent increase in commodities prices will also benefit the Middle East and North Africa and Sub-Saharan Africa regions, mounting domestic challenges promise to keep growth subdued.
UNITED STATES | April’s surge in retail sales bodes well for growth in Q2
Recent data suggest that the U.S. economy was somewhat more resilient at the beginning of the year, although performance was uneven. According to a second estimate, GDP increased at a seasonally adjusted annualized rate of 0.8% in Q1 (previously reported: +0.5% SAAR). The result, which was below the 1.4% expansion observed in Q4, showed a deterioration in investment and exports, while private consumption—the main engine of the economy—continued to grow, although at a slower clip. Consumer spending is likely to have remained buoyant at the outset of Q2 as retail sales surged in April. Meanwhile, the April jobs report grabbed the headlines, with payrolls growing less than expected and unemployment staying steady at 5.0%.
The U.S. continues to be one of the most buoyant advanced economies and analysts remain optimistic that growth will remain firm this year and next. Met the why particular panelists expect GDP to increase 1.9% in 2016, which was revised down a notch from the 2.0% expansion forecasted last month. For 2017, the panel sees GDP growth at 2.3%.
EURO AREA | Eurozone recovery gains steam in Q1
The Eurozone economy held up well in the first quarter of the year despite a number of external challenges. GDP growth picked up, likely on the back of strengthening domestic demand, although a breakdown by components is not yet available. An improving labor market and less austere fiscal positions are supporting growth, while external sector data continue to be lackluster. However, concerns over the pace of recovery persist and data for the second quarter are mixed: economic sentiment rose in May, but the composite PMI hit an over-one-year low in May. Meanwhile, Eurozone leaders made progress on one of the region’s major issues in May,approving a EUR 11.3 billion cash lifeline to Greece. The funds will allow Greece to repay its debts in the coming months and avoid a repeat of last summer’s ‘Grexit’ saga. Nevertheless, a number of political risks continue to plague the bloc, including rising support for nationalistic political parties and the chance of a vote for Brexit on 23 June.
The positive GDP reading for Q1 suggests that the Eurozone’s steady recovery is on track. Analysts kept their forecasts for the Eurozone’s economy unchanged 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 | Leap year helps economy avoid recession in Q1
Although the economy managed to avoid recession in Q1, this was mainly due to the positive impact of the extra day in February as 2016 is a leap year. Moreover, economic data suggest that growth remains subdued as a strong yen and a feeble global economic recovery are weighing on Japan’s economic activity. GDP expanded 1.7% in Q1 over the previous quarter in seasonally adjusted annualized terms (SAAR), which contrasted the 1.7% drop tallied in Q4. More recent economic indicators suggest that weaknesses in Q1 carried into Q2 as exports continued to decline in April and the manufacturing PMI hit a an over-three-year low in May. Growth in Q2 is also suffering from the impact of the earthquakes in April. Against this backdrop, analysts suggest that Prime Minister Shinzo Abe will resort to a new fiscal stimulus package to rekindle growth and that he will delay his plan to hike the consumption tax in 2017.
A strengthening yen, a weak global recovery and anemic domestic economic dynamics are clouding the outlook for the world’s third-largest economy. While further fiscal and monetary easing could boost growth in the short-term, the country needs to push forward structural reforms to achieve a more sustainable growth trajectory in the longer run. Analysts see the economy growing 0.5% this year, which is down 0.1 percentage points from last month's projection. Next year, they see GDP growth stable at 0.5%.
INFLATION | Global inflation hits a nearly-two-year high in April
Global inflation picked up from March’s 2.8% to 3.1% in April—the fastest rate since September 2014. Continued gains in crude oil prices are gradually feeding through to retail prices. That said, overall, oil and other commodity prices remain at relatively low levels and analysts do not foresee any sharp recovery, which dashes any chance of a strong rally in global inflation. Weather-related factors are also adding to global inflationary pressures.
Taking these developments into account, our panel of analysts expects that global inflation will be 3.3% in 2016, which is up 0.2 percentage points 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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