Global Economic Growth Is speeding Up: Outlook And Risks

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Enric Fernández (Caixabank) | The global economy accelerated at the end of last year and has continued to do so in the first few months of 2017. This dynamic has been a positive surprise after what happened in 2016. Let’s look back: at the beginning of the year, everyone was afraid of what the impact might be of the slump in oil prices on the producer countries and on creditors of the non-conventional oil sector; mid-year, the Brexiteers won the UK referendum, against the odds; and, some months later, Donald Trump was declared the winner in the US presidential elections, also defying expectations.

Any of these three shocks could have thrown the global economic recovery off track, but it didn’t happen. After the OPEC agreement to cut production, oil prices doubled from a minimum of below 30 usd/barrel. In the UK, the pound depreciated sharply, but business and confidence indicators not only held up, but strengthened in the months after the referendum thanks to the Bank of England’s support and a quick political transition period. And Trump’s victory was interpreted in a positive way as far as the outlook for growth and inflation (reflation) was concerned, pushing the US stock market to record highs, as well as boosting long-term debt yields.

In this context, the forecasts of the vast majority of analysts and international organisations point to an acceleration of global GDP growth in 2017. At CaixaBank Research we are predicting a growth rate in real terms of 3.4%, three tenths of a percentage point above last year. The improvement will be extensive for all the advanced economies (which we expect to grow 2%) as well as for the emerging markets (+4.5%). Lax monetary policies will continue to be supportive of economic growth (despite the rate hikes in the US), as well as prices of oil and other raw materials which represent a good balance – neither too high or too low – for the majority of producers and consumers.

Global economic growth forecasts

For the Eurozone, we are expecting similar growth to that of last year (+1.7%). That said, if the dynamism of the last few months continues, the figure could be closer to 2%. In fact we have just revised upwards our GDP growth forecast for Spain to 2.8% from 2.6%, given the strength of the business indicators in the first quarter. And we don’t rule out that growth could be nearer to the 3.2% registered last year. Spanish economic growth is also relatively balanced, with private consumption, investment and exports all acting as drivers. Without doubt, it’s a favourable backdrop for continuing to reduce the jobless rate and the public deficit, the two main challenges which our country’s economy faces.

There are a variety of sources of uncertainty and risk hovering over the central scenario for the global economy described above. The following are worth highlighting: the Trump’s administration direction, the possible effect of the Fed’s rate hikes on those emerging economies with more dollar debt, the Brexit negotiations and a European elections calendar which will be a resistance test for populism.
The most worrying element on the Trump’s administration political agenda is protectionism, which could give rise to trade frictions or trade wars. We expect, however, that the administration will focus more on obtaining better access to other markets for its exporters – a very reasonable goal- than making it more difficult for importers to sell their goods and services in the US market.
As far as the Fed is concerned, we think that monetary policy normalisation will not cause any major problems for the emerging countries, in as far as it’s predicted it will be carried out gradually –although not as gradually as markets still expect-. The Fed has announced that rates will likely be in the range of 2.00%-2.25% by end-2018, compared with 0.75%-1.00% in March, which implies two further hikes this year and three the following year (25 basis points each). It’s likely the markets will eventually align their expectations with these announcements without any major upheavals. Problems could arise in a context of greater inflationary pressures which would oblige the Fed to speed up the rate hikes. In this sense, the Trump administration’s intention of implementing an expansionary fiscal policy could imply a risk, but it seems very unlikely that Congress will support big stimulus measures.

As far as Brexit goes, it seems inevitable that the uncertainty over the final result of the negotiations, combined with the loss of purchasing power due to the pound’s depreciation, will end up having some negative impact on the UK economy. To avoid this impact from being very significant – which would also affect the rest of the EU economies – it would be best if an agreement over the terms of the UK’s departure is reached quickly and negotiations can soon focus on a new framework for EU-UK relations. As these will be very complex and will take time to finalise, it would also be reasonable to agree on the possibility of a transition phase that reduces the expectations of an abrupt change in the rules of the game down the road.

In Europe, everyone is also focusing, logically, on the French elections. The results will test the European project or will provide an important boost for an EU in need of a strong French-German axis, committed to building a common future.

For the time being, the global economy is advancing, confident that, most probably, none of the risks described above will materialise. We hope this will be the case. In such scenario, we could even see a further acceleration of the pace of growth for the global economy.