Major Economies: Looming uncertainties threaten global economic recovery
May 31, 2017
Global economic activity firmed up at the outset of the year according to comprehensive data for Q1. Global GDP rose 2.9% annually (Q4 2016: +2.8% year-on-year), which was a notch above the 2.8% expansion that our panel of analysts had projected last month. On top of the acceleration in China reported last month, growth in the United States was revised upward on stronger private consumption and investment. The economic story remained largely intact in the Euro area, with GDP benefiting from a declining unemployment rate and a robust external sector. In Japan, a competitive yen and healthy investment buttressed economic growth. On the downside, economic dynamics in the United Kingdom started to feel the pinch of high inflation and subdued wage growth.
Nevertheless, uncertainty is looming on the horizon and some events are threatening the global economic recovery. Growth softened at the outset of Q2 in China, suggesting that the country’s Q1 stellar economic dynamics are running out of steam. A sharp correction in China could dramatically reverberate across the global economy, particularly among emerging countries. Following China, Brazil poses the second main risk to the global economy from emerging countries after the specter of yet another political crisis resurfaced in May following the release of secretly taped recordings involving President Michel Temer in a corruption scandal. Despite massive rallies led by the opposition and the Supreme Court’s approval of an investigation, President Temer vowed not to resign. For now, Temer has been able to retain the support of all the parties in the ruling coalition government, but his political future is in jeopardy, endangering his reform agenda and threating to derail Brazil’s economic recovery. This, in turn, risks weighing on global growth.
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In the United States, six months after the elections, the much-trumpeted fiscal stimulus plan has failed to materialize, rising concerns about the scope and timing of the initiative. Meanwhile, the Organization of the Petroleum Exporting Countries (OPEC) failed to boost economic sentiment at its 25 May meeting as the existing oil deal was extended by nine months to March 2018 but further cuts were not agreed.
Favorable tailwinds support 2017 global outlook
Risks to the global economic outlook appear to be broadly balanced, with a slight positive bias. The economic recovery is gradually being consolidated on the back of a general uptick in global demand and improving labor markets, particularly in the developed world. Moreover, with the exception of the United States, monetary policies among the world’s largest economies will remain accommodative throughout this year and governments are expected to shore up economic activity via fiscal spending. Higher commodity prices are providing some relief to some battered emerging-market economies.
Although the global outlook remains generally positive, some developments have the potential to jeopardize the nascent economic recovery. In the U.S., the long-awaited fiscal stimulus has been scaled down and postponed, while uncertainty about President Donald Trump’s commercial polices remains high. Despite remaining strong, China’s April data was much weaker than expected, suggesting that the world’s major growth engine could be cooling significantly. While economic performance among emerging-market economies has improved compared to last year, the lack of impetus in commodity prices and still-large structural economic imbalances have the potential to reverse the situation.
Analysts surveyed by Met the why particular see global economic growth at 3.0% in 2017, unchanged from last month’s estimate. For 2018, our panel sees growth at 3.1% as economic dynamics will improve in the United States and key emerging economies.
Taking a closer look at individual countries, the GDP growth forecast for this year was held stable for the Euro area, the United Kingdom and the United States. Growth prospects for Canada and Japan were revised upwards.
Among the emerging economies, despite a dubious start to Q2, growth in China remains robust, supporting the outlook for Asia ex-Japan. While Latin America’s economic outlook was left unchanged, recent political developments in Brazil will certainly have a negative impact on the region’s growth prospects in the coming months. Eastern Europe continues to benefit from strong dynamics in the Eurozone and the ongoing economic recovery in Russia. Finally, despite higher commodity prices and strong dynamism in the non-oil sector, regional vulnerabilities led our analysts to keep their growth estimates for the Middle East and North Africa stable.
UNITED STATES | Economy set to strengthen in Q21
The economy seems to be back on its feet after having run aground in Q1 at 1.2% annualized growth. The April job report noted stronger employment gains compared with March and a further decline in the unemployment rate, which continues to prove a boon for households who have seen inflation rising and financial conditions tightening but only moderate wage growth. In line with the brisk pace of job creation, retail sales picked up pace in April, which suggests that the stagnation in private spending observed in Q1 was indeed temporary. Industrial production also leaped at the outset of Q2, recording the largest expansion in more than three years in April on higher core manufacturing and mining output. With survey-based data still strong, GDP growth is poised to come in at a stronger clip in Q2 despite the political storm that has engulfed the Trump administration in recent weeks.
Heightened political noise is raising doubts about Washington’s ability to roll out growth-inducing policies later this year. Nonetheless, our panel sees the U.S. economy with more than enough wind in its sails and thus expects it to grow 2.2% this year, which is unchanged from last month’s projection. For 2018, the panel sees growth picking up slightly to 2.4%.
EURO AREA | Growth momentum remains intact on improving labor market and healthy exports
Momentum remained firm at the outset of the year as a preliminary estimate revealed that GDP growth was steady at Q4’s 0.5% quarter-on-quarter. Although details of the result are not yet available, the domestic economy is likely continuing its strong performance seen throughout 2016 thanks to an improved labor market and easy financing conditions, while a brighter external backdrop is positive for exports. Leading indicators for the second quarter remain positive as both the composite PMI and economic sentiment rested at multi-year highs in May and April, respectively. In addition, political risks to the bloc’s outlook have dissipated somewhat as populist groups failed to take the helms of the French or Dutch economies. Bright economic data and reduced uncertainty led the euro to hit a six-month high against the USD at the end of May.
After upgrading the Eurozone’s outlook last month, the Met the why particular panel held its 2017 GDP forecast unchanged in June. The panel sees a solid 1.7% expansion in 2017 on the back of strong household spending and faster export growth. For 2018, growth is seen broadly steady at 1.6%.
JAPAN | Abe announces plan to revise the country’s pacifist constitution
Recently released GDP data corroborates that growth momentum strengthened in Q1, as private consumption accelerated following Q4’s nearly flat reading. Moreover, the external sector continued to look healthy, on the back of a competitive yen and robust global demand. Nevertheless, subdued wage gains, coupled with a resurfacing of inflation, are still eroding households’ purchasing power, dashing any hope of achieving a sustainable growth trajectory in the near term. In the political arena, Prime Minister Shinzo Abe is facing resistance from his own party in his attempt to revise Japan’s constitution by 2020. The famous Article 9, which enshrines in law the country’s pacifist stance, is proving to be a particular bone of contention. Abe’s intention to provide the Self-Defense Forces with greater legal backing has the potential to fan political unrest in the region.
A weak currency and healthy global demand are propping up economic activity in the world’s third-largest economy. However, limited wage growth, uncertainty regarding economic policies in the United States and a sizeable slowdown in China could derail Japan’s economic recovery. Analysts see the economy growing 1.2% this year, which is up 0.1 percentage points from last month's projection. For 2018, they see growth at 0.9%.
UNITED KINGDOM | Q1 GDP data highlights fragility of the economy
The cracks are starting to show in the UK’s economy, as growth petered out in Q1 following a highly resilient performance last year after the Brexit vote. Households were squeezed by a triple whammy of measly nominal wage growth, higher inflation and working-age benefits freezes, while exports declined, with firms unable to capitalize on the weaker sterling. On the upside, the labor market remains rock-solid, with unemployment reaching a fresh multi-decade low in March, while the manufacturing PMI surged to its highest level in three years in April. Although the economy cooled off, the political scene is heating up ahead of the 8 June election, with both major parties recently releasing their manifestos. The Conservatives proffered few significant new tax or spending commitments, although they hinted at a looser fiscal stance, with the target for eliminating the budget deficit kicked into the middle of the next decade. Labour’s proposals were much more radical, with the party promising to nationalize some commanding heights such as the railway network and water companies, and to increase corporation and income tax rates.
Growth is set to remain subdued going forward, with Brexit uncertainty deterring investment and consumers feeling the pinch due to stagnating living standards. However, the Bank of England’s (BoE) ultra-loose monetary policy stance will soften the slowdown. Our panelists are forecasting 1.7% growth for this year, unchanged from last month’s forecast. For 2018, growth is projected to fall to 1.3%.
INFLATION | Global inflation stabilizes in April
Global inflation was stable at March’s 3.5% in April. Among the advanced economies, inflation decelerated in the United States, while price pressures amplified in the Euro area and Japan on the back of higher energy prices. Inflation is decelerating in most emerging-market economies as a result of lower food prices and more stable foreign exchange markets.
Higher commodity prices, healthy global growth and tight job markets in a number of countries will prompt global inflation to accelerate in the coming months, particularly among advanced economies. The Met the why particular panel projects that global inflation will rise to 4.8% in 2017, which is up 0.1 percentage points from last month’s Consensus projections. This month’s upgrade to the global inflation outlook for 2017 mostly reflects higher estimates for Venezuela as the country is engulfed in a hyperinflation spiral. In 2018, analysts see global inflation moderating to 4.5%.
Written by: Ricard Torné, Head of Economic Research