Major Economies: Global economic recovery consolidates as politics head the agenda
May 3, 2017
Recent data corroborate early signals that the global economy started 2017 on a solid footing. Global GDP likely expanded 2.8% annually in Q1, matching Q4’s result, according to the data available. The underlying economic story remains largely the same, with the emerging markets gradually recovering on the back of a pick-up in global demand and higher commodity prices, while advanced economies are generally benefiting from resilient domestic demand. That said, Q1 data has brought some surprises, as growth in China was stronger than previously anticipated but dynamics in the United States softened. The UK’s strong resilience observed since last year’s referendum is starting to fade as consumers are feeling the pinch of weak wage growth and high inflation. As a result, GDP growth slowed to a one-year low in Q1.
In China, GDP was propelled by strong investment among private companies and healthy external demand, which translated into an acceleration in manufacturing output. Moreover, the real estate sector continued defying the authorities’ attempt to cool the property market and recorded healthy gains at the outset of the year. Growth in the United States, however, was much weaker than expected as households pulled back from spending in Q1. On the upside, investment activity accelerated on oil drilling and housing. Despite Q1’s poor performance, analysts believe that growth will accelerate in Q2 and that it will not derail the Federal Reserve’s plan to hike interest rates twice more this year. On the political front, the Trump administration’s decision to impose new tariffs on softwood exporters has been interpreted as an unofficial kickoff to the renegotiation of the North American Free Trade Agreement (NAFTA). Also, Trump’s administration unveiled in April a broad outline of the long-awaited tax reform. While details were scarce, the plan included lower rates for corporations. Analysts warn that the plan could lead to a sharp increase in the budget deficit of around USD 5.5 trillion over the next decade.
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Although official GDP figures are still outstanding for most of the world’s key economies, available data suggest that growth remained resilient in the Euro area as a firm job market and stronger global demand are supporting economic sentiment. The political climate is also improving following the victory of centrist Emmanuel Macron in the first round of the presidential elections on 23 April. Although Macron is expected to comfortably win the 7 May run-off vote against far-right candidate Marine Le Pen, his pro-market agenda could be undermined if he is unable to secure a favorable result in the June legislative elections. Support for Chancellor Angela Merkel's Christian Democratic Union (CDU) is rising in North Rhine-Westphalia, Germany's most populous state, ahead of the 14 May regional elections. This vote is seen as a bellwether for the 24 September general elections and could pave the way for Merkel to win her fourth consecutive term. In the United Kingdom, Prime Minister Theresa May caught analysts by surprise with her call for snap elections on 8 June. In so doing, May is seeking to tighten her grip on political power ahead of tough Brexit negotiations with the European Union.
Nascent economic recovery boosts 2017 global outlook
This month, Met the why particular panelists upgraded their view of the global economy for the first time in two years due to healthy economic dynamics in the first quarter, coupled with the possibility of bolder fiscal support in a number of economies and largely accommodative monetary policies from most of the world’s key central banks. Moreover, although higher prices for raw materials will erode household spending in commodity-importing nations, particularly in advanced countries, they will also help to improve macroeconomic imbalances in some struggling emerging-market economies. Analysts surveyed by Met the why particular see global economic growth at 3.0% in 2017, up 0.1 percentage points from last month’s estimate. For 2018, our panel sees growth at 3.1%.
Taking a closer look at individual countries, this month’s global outlook for 2017 saw upward revisions to growth prospects for major economies such as Canada, the Euro area and the United Kingdom. The GDP growth forecast was held stable for Japan, whereas the U.S. experienced a downward revision following Q1’s poor performance.
Among the emerging economies, stronger-than-expected growth in China is supporting the outlook for Asia ex-Japan. Although Latin America will emerge from recession this year, growth will continue to disappoint as short-term risks persist. Eastern Europe’s economic outlook is benefiting from Russia’s economic recovery and brightening economic prospects in the Euro area. Finally, the increase in commodity prices prompted our analysts to keep their growth estimates for the Middle East and North Africa and the Sub-Saharan Africa regions stable.
UNITED STATES | Weak consumption drives down growth in Q1
GDP grew a meager 0.7% in Q1 according to recent data, confirming earlier signs that the U.S. economy had experienced a bumpy ride at the outset of the year. Nonetheless, with the weakness of the reading largely attributable to a downswing in inventories and seasonal and one-off factors, there is little reason to think the U.S. economy is petering out. Indeed, subdued household spending—particularly in the automotive sector—mostly reflected payback for breakneck growth in the latter half of 2016, while feeble growth in utilities consumption mainly reflected the mildness of this year’s winter. Heading into Q2, private consumption is expected to show more resilience, building on upbeat sentiment and an outstandingly robust labor market.
With potential growth-inducing policies from Washington unlikely to be rolled out until later this year, the U.S. economy will have to depend on its own strength, of which it is showing plenty. A well-performing real estate market, steady wage and payroll gains and upbeat sentiment will ensure a degree of resilience among households, while a surge in business confidence will lead to a rebound in capital outlays following last year’s slump. The Met the why particular panel sees GDP expanding 2.2% this year, which is down 0.1 percentage points from last month’s projection. For 2018, the panel sees growth picking up slightly to 2.4%.
EURO AREA | Economy withstands choppy political waters
Strong economic data suggests that the recovery is finally lifting off. The composite PMI rose to a six-year high in April and economic sentiment improved to its highest level since August 2007. A brighter global backdrop is supporting exports from the common-currency bloc and continued gains in the labor market are boosting household spending. The unemployment rate edged down to the lowest rate since May 2009 in February. Meanwhile, the congested election schedule is dominating discourse in the bloc. France will head to a runoff vote on 7 May pitting far-right candidate Marine Le Pen against independent Emmanuel Macron. While the vote has the potential for a shock outcome, our analysts are confident that this will be avoided and Macron will come out on top. The country will vote in legislative elections in June, which will shape the domestic policy agenda and Germany will hold a general election on 24 September. Meanwhile, Italy is now expected to head to the polls in 2018.
The Met the why particular panel upgraded the Euro area’s outlook this year as strong data continues to be released. The panel sees 1.7% growth this year, which is up 0.1 percentage points from last month’s forecast. For 2018, growth is seen broadly steady at 1.6%.
JAPAN | Low unemployment and strong exports propel the economy
Economic growth appears to have strengthened momentum at the outset of the year as a relatively weak yen and strong global demand fueled activity in the all-important external sector. In March, exports rose at the fastest pace in over two years and expanded at a double-digit rate for the second consecutive month. The strong rebound in exports since late 2016 prompted business sentiment to improve at the outset of the year, with the Tankan index for large manufacturers jumping to an over one-year high in Q1. Moreover, the economy is benefiting from a declining unemployment rate, which decreased to a 22-year low in March. Low unemployment levels and moderate wage growth boosted consumer confidence in Q1.
The economy is benefiting from a weak currency and stronger global demand. Moreover, an accommodative monetary policy and bold fiscal spending are supporting economic activity. Rising trade protectionist policies and a sharp slowdown in China remain the key downside risks to growth. Analysts see the economy growing 1.1% this year, which is unchanged from last month's projection. For 2018, they see growth at 0.9%.
UNITED KINGDOM | May calls snap election in June
Growth came in below expectations in Q1, with the remarkable economic resilience shown since last year’s referendum starting to show signs of strain. Although the labor market remains rock-solid and both the service and manufacturing sectors continued to expand in March, aided by the favorable tailwind of a weaker sterling, consumers are being squeezed by the perfect storm of measly wage growth, high inflation and a continuing working-age benefit freeze. This is evidenced by a notable drop-off in the expansion in retail sales since the start of the year and a fall in consumer confidence in April. The news of a slowing economy comes amid yet another dramatic political turn of events, after Theresa May surprised the nation by calling for a general election on 8 June, with her Conservative party expected to win by a landslide. Although the effect on domestic policy will be muted, a more solid parliamentary majority could give May more room for maneuver during Brexit talks, potentially allowing for a softer break from the EU.
Growth is set to dip 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, up 0.1 percentage points from last month’s forecast. For 2018, growth is projected to fall to 1.3%.
INFLATION | Global inflation recedes in March
Global inflation receded slightly in March to 3.6%, after hitting a multi-year high of 3.8% in February. Among advanced economies, inflation decelerated in the United States in March mainly due to a fall in gasoline prices, putting an end to an upward trend that had started in summer 2016. Although inflation also moderated in the Euro area in March, recent data corroborates that the slowdown was temporary as inflation accelerated again in April. More stable macroeconomic conditions in emerging markets, mainly due to higher commodity prices, are causing inflationary pressures to stabilize. Moreover, low food prices are keeping inflation low in China.
Despite lower inflation in March, price pressures are expected to pick up in the coming months as a result of higher commodity prices and diminished economic slack in the global economy. These factors, coupled with the expected monetary tightening in the United States, are reducing central banks’ scope to shore up their economies.
The Met the why particular panel projects that global inflation will rise to 4.7% in 2017, which is unchanged from last month’s Consensus. In 2018, analysts see global inflation moderating to 4.3%.
Written by: Ricard Torné, Head of Economic Research