Major Economies Economic Outlook September 2017

Healthy global economic momentum seen continuing into Q3

Major Economies: Healthy global economic momentum seen continuing into Q3

August 30, 2017

Dynamic global trade and improved labor markets, coupled with fiscal stimulus and accommodative monetary policies in key countries, are prompting the global economy to consolidate its healthy growth trajectory. A comprehensive estimate for the global economy corroborates that GDP expanded 3.1% annually in Q2, matching the result in Q1 and in line with what our Consensus Forecast had expected last month. Economic momentum is expected to continue in Q3, with the global economy forecast to expand 3.1% again.

Economic activity improved in most of the advanced economies in Q2, with the Euro area leading the pack. The euro bloc’s economy expanded at the fastest pace in over six years on the back of robust domestic demand. The Euro area’s strong recent economic performance is largely due to a declining unemployment rate, along with the European Central Bank’s (ECB) monetary stimulus program. Against this backdrop, analysts are now betting on the timing of monetary policy normalization in the Euro area. While economic data for Q3 corroborates that the Euro area’s economy is in good shape and that the ECB could start tapering its qualitative easing (QE) sooner rather than later, inflation remains below the ECB’s target of “below but close to 2%”, adding uncertainty about the Bank’s next step. In the United States, the economy also gathered steam in Q2 following Q1’s disappointing result. As in other advanced economies, domestic demand led the acceleration due to a healthy job market and strengthening confidence about the economic recovery.

Elsewhere, Japan’s domestic economy propelled growth in Q2 to levels last seen over two years ago. Resilient household consumption raised hopes that Japan may have entered a more sustainable growth trajectory. In the UK, uncertainty about the future of the economy, together with eroded wages due to higher inflation, led the economy to slow in Q2. Among the key emerging market economies, China’s economy continued to show strong resilience in Q2, while the economic recovery in Russia continued to gather pace, with GDP expanding at the fastest pace in nearly five years.

While analysts were hoping that this year’s long-awaited Jackson Hole Economic Policy Symposium would deliver some clues to the future of monetary policy in the Euro area, the gathering proved to be disappointing in that respect, as ECB President Mario Draghi did not unveil details about the ECB’s approach to cutting back its asset purchase program. In the same vein as her colleague in Europe, Federal Reserve Chair Janet Yellen did not provide forward guidance on future monetary policy moves by the Federal Reserve, in a context of low unemployment, rising asset prices and a stubbornly low inflation rate. Instead, she praised the financial regulations put in place since the global financial crisis to limit financial risks. Yellen’s speech has been seen as a critique of President Donald Trump and his stated intention to roll back certain post-crisis reforms. Yellen's term expires in February, and Trump has not stated whether he will reappoint her.

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Strengthening global economic recovery boosts 2017 outlook

This year, the global economy will benefit from stronger growth among most advanced economies, including the Euro area and the United States. Moreover, economic recoveries in key emerging markets such as Brazil and Russia will boost global output. Analysts surveyed by Met the why particular foresee the global economy expanding 3.1% in 2017, which is up 0.1 percentage points from last month’s estimate. Next year, the global economy is forecast to grow at the same pace. 

This month’s upgrade to the global economic outlook reflects stronger projections for Canada, the Euro area and Japan, as the economic recovery is quickly consolidating in these economies. Growth prospects for the United Kingdom were unchanged this month, while the outlook for the United States was downgraded.

Taking a closer look at emerging economies, the Asia ex-Japan region is benefiting from resilient dynamics in China and strengthening domestic demand in a number of other countries. Resilient growth in the Euro area and the continued recovery in Russia are boosting the economic outlook in Eastern Europe. While Latin America will emerge from recession this year, mounting political risks are limiting the extent of the recovery. Low commodity prices and growing geopolitical threats continue to dent growth in the Middle East and North Africa and the Sub-Saharan Africa region.

UNITED STATES | Economy bounces back in Q2 from Q1’s poor performance

The economy kicked into higher gear in Q2, expanding at double Q1’s pace on account of rising household consumption. The solid Q2 print, however, was partially overshadowed by downward revisions in the numbers for the preceding quarters, painting a slightly bleaker picture of the economy’s health. Nonetheless, economic momentum seems to have firmed up in Q3. The labor market posted yet another month of strong gains in July as robust payroll numbers led the unemployment rate to inch down. In turn, strong jobs gains and solid growth in disposable income—partly the result of subdued inflation—caused retail sales growth to post its best reading so far this year in July. With manufacturing activity showing no signs of slowing down and business and consumer sentiment both hovering around multi-year highs, attention has once again turned to Washington, where members of Congress are about to face two daunting battles: raising the debt ceiling and passing a budget resolution before the end of September. 

Analysts continue to temper their growth expectations as hopes for a sizeable fiscal stimulus plan grow dimmer. Nonetheless, the U.S. economy will continue to expand at a moderate pace as a tight labor market and a turnaround in investment shore up domestic activity. Our panel of economists expects growth of 2.1% this year, which is down 0.1 percentage points from last month’s forecast. In 2018, our panel expects growth to pick up slightly to 2.3%. 

EURO AREA | Healthy economic momentum continues in Q3  

The Eurozone’s recovery strengthened in Q2 as GDP increased at the fastest pace since Q1 2015. Although a full breakdown of the result is not yet available, domestic demand likely remained in the driver’s seat, fueled by upbeat confidence and an improving labor market. In addition, a stronger global economy is supporting export growth, despite an appreciation in the euro that is weighing on competitiveness. Leading indicators for Q3 point to solid continued momentum. Economic sentiment rose to a near-decade high in July, and the manufacturing PMI inched up. Moreover, the robust growth is being complemented by a quiet political scene. The common-currency bloc has avoided a political upset so far this year, and the upcoming German elections on 24 September are widely expected to yield a victory for Angela Merkel’s CDU, a market-friendly outcome. 

Accommodative monetary policy, falling unemployment and reduced uncertainty will support a robust expansion this year. The Met the why particular panel sees GDP growing 2.0% in 2017, which is up 0.1 percentage points from last month’s estimate. For 2018, growth is seen at 1.8%. 

JAPAN | Healthy domestic demand in Q2 revives hopes of an economic upturn 

A combination of improving consumer confidence and dynamic investments led the economy to expand at the fastest pace in over two years in Q2. Private consumption is slowly gathering pace due to moderate wage growth and low unemployment. However, it is too soon to say whether the long-awaited improvement in household spending will be sustainable, as income growth remains limited. In turn, investment is benefiting from accommodative financial conditions, healthier domestic demand and construction projects related to the 2020 Olympic Games to be held in Tokyo. The contraction in exports of goods and services could be a signal that the global economic cycle is peaking, which could have a severe impact on Japan’s export-driven economy. In an attempt to breathe new life into his government following the disappointing results in Tokyo’s 2 July Metropolitan assembly election, Prime Minister Shinzo Abe reshuffled his cabinet on 3 August. While Abe’s move will not change the overall direction of his economic policies, it is expected to help him cement his grip on power. 

Resilient global growth and improving domestic demand are propping up Japan’s economy this year. However, mounting geopolitical risks could lead the yen to appreciate, hurting the external sector. Analysts see the economy growing 1.4% this year, which is up 0.1 percentage points from last month's projection. For 2018, they see growth at 1.0%. 

UNITED KINGDOM | Economy settles into lower growth trajectory as Brexit uncertainty looms 

Recently-released Q2 GDP figures confirmed that the economy has sunk into a new lower-growth trajectory, with the UK lagging behind many other advanced economies so far this year. Although greater current and capital spending in the public sector propped up the economy in the second quarter, growth was dragged down by stalling business investment and meager private consumption, with households hit by declining real wages. The sharp deterioration in consumer sentiment since the elections in early June doesn’t bode well for private consumption going forward. Nevertheless, other indicators paint a more nuanced picture: the unemployment rate reached another multi-decade low in June, while both the services and manufacturing PMIs rose in July. On the political scene, the government has recently published a series of Brexit position papers in an attempt to move negotiations forward. The EU, however, is holding firm, insisting that talks regarding a future trading relationship won’t begin until sufficient progress has been made on establishing exit terms. 

The economy will slow this year, as higher inflation eats into consumers’ purchasing power, and uncertainty created by Brexit negotiations and a minority government at home deters investors. However, the Bank of England’s ultra-loose monetary policy stance and healthy global demand should cushion the slowdown. Our panelists estimate 1.6% growth for this year, which is unchanged from last month’s forecast. For 2018, growth is projected to fall to 1.3%. 

INFLATION | Global inflation inches up in July

Global inflation rose from June’s 3.2% to 3.3% in July. Overall, inflationary pressures remain subdued on the back of low commodity prices and improved weather conditions that boosted food supply in some countries. Inflation was steady in key economies such as Japan and the European Union. Inflation accelerated in Canada, India and the United States, while price pressures diminished in Brazil, China and Russia.

Against a backdrop of contained inflationary pressures, Met the why particular Consensus Forecast panelists cut their estimates for this year’s global inflation by 0.1 percentage points. The Met the why particular panel projects that global inflation will be 4.6% in 2017 and in 2018 analysts see global inflation moderating to 4.4%.

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Written by: Ricard TornéHead of Economic Research

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