Thursday, February 2, 2017
The Global Economy: A Rough Ride into 2017
Year 2016 ended on a rather low note for the global economy with low output and employment growth, stagnant global trade, subdued investment, and heightened policy uncertainty marking another difficult year. Global growth in 2016 is estimated at a post-crisis low of 2.3 per cent by the World Bank, while the IMF estimate is at a slightly higher 3.1 per cent (See: http://www.ecofin-surge.co.in/index.html or http://www.slideshare.net/EcofinSurge/gr-prjctns-32631011). World trade growth for 2016 is estimated by World Bank to have fallen from 2.8 per cent in 2015 to 2.5 per cent, while the IMF estimate for 2016 is at an even lower 1.9 per cent. In the second half of the year growth did rebound in the US after a weak first half of 2016. Output remains below potential in a number of other advanced economies, notably in the Euro area, though growth figures were somewhat stronger than previously forecast in some economies, such as Spain and the UK, where domestic demand held up better than expected in the aftermath of the Brexit vote. The growth rate in China was slightly stronger than expected, supported by continued policy stimulus, though deep concerns remain over imbalances caused by the country’s reliance on credit and its high savings rate. But activity was weaker than expected in some Latin American countries currently in recession, such as Argentina and Brazil, as well as in Turkey, which faced a sharp contraction in tourism revenues. Activity in Russia was slightly better than expected, in part reflecting firmer oil prices.
While slowing investment growth is partly a correction from high pre-crisis growth rates in some EMDEs, it also reflects a range of obstacles holding back investment, including terms-of-trade shocks for oil exporters, slowing foreign direct investment inflows, as well as private debt burdens and political risks. Commodity prices have stabilized and are projected to increase moderately during 2017-19, providing support for commodity-exporting EMDEs. The rise in US yields since early November has led to a notable tightening of financing conditions for EMDEs, in some cases resulting in significant currency depreciation and portfolio outflows. High corporate debt, declining profitability, weak bank balance sheets, and thin policy buffers in several economies add to concerns. Fiscal stimulus, if implemented in key economies, could result in stronger growth. Monetary policy has so far remained mostly accommodative across the globe; however fiscal space remains inadequate in several economies, both advanced and emerging, because of already high public debts.
Risks to the global growth outlook are assessed to be skewed to the downside. A projected stabilization in energy and commodity prices may provide a small tailwind for resource rich economies in 2017, but the medium-term trend continues to be dominated by weak investment growth. Adding to the inertia is a wait-and-watch attitude among corporates and governments. Going into 2017, businesses have to prepare for more disruptions from geopolitical tensions, policy uncertainty, and financial market volatility. Lingering uncertainty about the course of US economic policy could have a significantly negative effect on global growth prospects as the new US government’s policies take shape. Accelerating inflation and a soaring US dollar are among the risks to the economic balance. Even more alarming is the fact that recent political developments highlight a fraying consensus about the benefits of cross-border economic integration. Major policy shifts along these lines are seen to lead to potential widening of global imbalances coupled with sharp exchange rate movements and in response could further intensify protectionist pressures. Increased restrictions on global trade and migration would hurt productivity and incomes, and take a toll on market sentiment as well, leading to a vicious circle of growth debilitating outcomes.