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Global Forecasting Service
Global outlook summary
(Forecast closing date: April 13th 2017)
World economy
A cyclical improvement is under way,
but risks abound
Several months into 2017 the global economy looks healthier than it has been
for some time. Two interest-rate rises in three months by the Federal Reserve
(Fed, the US central bank), faster inflation, higher manufacturing purchasing
managers' indices, stronger activity in the Chinese property market and falling
unemployment rates in the developed world are all indicators of an
acceleration in economic growth this year. The big concerns about the global
economy in recent years—deflation, negative government bond yields and
overly restrictive fiscal policies—have all become less apparent in the past year.
Consequently, The Economist Intelligence Unit expects the world economy to
expand by 2.6% in 2017, compared with 2.2% in 2016.
There are, however, a number of important caveats to this generally upbeat
story. We have revised down our forecast for US growth in 2017 from 2.3% to
2.2%, as leading indicators suggest that buoyant consumer and business
confidence have not translated into rapid growth in the first quarter. Aggregate
growth in the EU is likely to be fractionally slower in 2017 than in 2016, owing
to weaker performances in Germany, Spain and the UK, while China's
expansion continues to be fuelled by ever-increasing levels of debt. Meanwhile,
OPEC's failure to drive up the oil price by restricting supply means that
conditions have been more difficult than expected for the cartel's members.
Against this backdrop of an uneven economic acceleration lies the highest level
of political risk in years. A US airstrike on a Syrian government airfield in midApril raised not only the possibility of another American military commitment
in the Middle East, but also the chance of the US and Russia taking sides against
each other in a live conflict. At best, the airstrike was a one-off flexing of
American muscle that might deter the Syrian president, Bashar al-Assad, from
further use of chemical weapons on his people. At worst, it could result in an
escalation of the Syrian civil war with more intense involvement from a group
of world and regional powers: the US, Russia, Iran and Saudi Arabia. We expect
events to follow a path somewhere between the two. The missile strike is likely
to lead to more intense fighting, with retaliatory attacks by the regime in turn
precipitating greater support for the rebels by their international backers in the
Gulf. The net result of this would be to extend the status quo, with both sides
incapable of achieving an outright victory. Alongside an escalation of the
Syrian conflict, military action precipitated by the bellicose rhetoric of the
North Korean regime and any fracturing of the US-China relationship represent
the biggest geopolitical risks to our economic forecast.
May 2017
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© The Economist Intelligence Unit Limited 2017
2
Global outlook
A more sober assessment of prospects
under a Trump administration
In the US the initial positive market reaction to Donald Trump's election as
president has been tempered by concerns over the administration's ability to
achieve its aims. Mr Trump's first moves have misfired, with a tightening of
immigration from Muslim-majority countries rejected by the courts and the
Republicans' replacement plan for the Affordable Care Act (Obamacare) failing
before it could even be brought before Congress. Financial markets are
delivering their own verdict: US bond yields were no higher in mid-April than
they were in late November, and the broad trade-weighted value of the
US dollar has fallen by around 3% so far in 2017. Aside from the growing
likelihood that pro-growth infrastructure and tax policies will be delayed or
prove disappointing, investors have started to pay more heed to downside risks
under a Trump administration, notably those stemming from protectionist trade
policies and further aggressive and erratic actions in foreign and defence policy.
The French presidential election
represents populism's next opportunity
Mr Trump's election victory was part of a broader trend in Western
democracies. Like the UK's decision to leave the EU and the rejection of a
referendum on parliamentary reform in Italy in December, it saw voters rebel
against an establishment that they perceived to be pursuing the wrong course.
Some of these political changes were the culmination of a long-term decline of
popular trust in government institutions and political parties. They also signify
unhappiness with stagnant incomes. Above all, they demonstrate that society's
marginalised and forgotten voters are demanding a voice—and if the
mainstream parties will not provide it, they will look elsewhere.
Of particular significance in the coming months is the presidential election in
France. The election is a two-step process, with the two candidates with the
most votes in the first round then facing a run-off. It is a system designed to
minimise surprises, but the election has thus far been unpredictable. The one
constant has been the likelihood that Marine Le Pen of the far-right Front
national (FN) will reach the run-off. There she is most likely to face Emmanuel
Macron, a former economy minister who is now an independent. Although
Ms Le Pen has succeeded in dragging FN into the political mainstream, we
believe that Mr Macron would attract sufficient support from the centre-right to
keep her from power. Ms Le Pen favours a French withdrawal from European
economic and monetary union. Were she to win, a period of turbulence in
global financial markets would be in prospect.
Developed world
The US is set for two more years of
economic expansion
May 2017
The US economy is in relatively good shape, buoyed by rapid employment
growth and rising wages. As has regularly been the case in recent years, the first
quarter of 2017 is likely to have been soft, but we expect stronger growth in the
second half of the year. Without a boost to productivity or a broad
improvement in the global economy, economic growth of around 2% is the new
normal for the US. We forecast average real GDP growth of 2.2% in 2017-18,
before a business cycle recession in 2019. We forecast that Europe's muted
recovery will be consolidated over the forecast period, although political risk
will remain high. For Japan we forecast growth averaging just 0.7% a year in
2017-21. The economy will be constricted by a shrinking workforce, a rising oldage dependency ratio and tight immigration controls. Inflation will remain well
short of the Bank of Japan's target of 2%.
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© The Economist Intelligence Unit Limited 2017
Global outlook
3
Emerging markets
Slow monetary tightening in the US will
give emerging markets breathing space
On the assumption that Mr Trump makes only modest adjustments to US trade
policy, the outlook for emerging markets in 2017 is reasonable, with growth
quickening to 4.7% from an estimated 4.1% in 2016. Brazil and Russia, the thirdand fourth-largest emerging economies, will both emerge from lengthy
recessions. Overall, emerging markets will benefit from the rise in commodity
prices. Furthermore, we expect financing conditions to remain relatively benign,
albeit subject to occasional episodes of volatility.
In 2016 China grew by 6.7%, in line with the official target, despite persistent
inefficiencies in the state sector and recessionary conditions in the industrial
north-east. However, this was achieved at the cost of a further increase in
indebtedness, accompanied by a property bubble in some cities. The build-up
in debt, particularly in the corporate sector, is unsustainable, and we think that
once the president, Xi Jinping, has consolidated his power at a party conference
late in the year, he will sanction policies to rein in credit. Firms in the
construction and real-estate sectors will be hit hardest. As a result, we forecast
that growth will slow sharply in 2018, to 4.5%, from 6.6% in 2017.
India has a bright future if it can get
through painful reforms
With China losing momentum, India will be Asia's fastest-growing large
economy in 2017-21, expanding at an average annual rate of 7.6%. However, the
economy is also going through a painful period. A lending spree earlier this
decade has saddled state-owned banks with bad loans. Combined with excess
capacity in the steel industry, this will depress corporate lending and
investment for some time yet. We expect GDP growth in fiscal years 2016/172017/18 (April-March) to average 7.2%, before growth accelerates as the major
reform programme led by the pro-business prime minister, Narendra Modi,
generates greater benefits, especially in infrastructure and policymaking.
Mr Trump casts a shadow over Latin
American growth prospects
Brazil's emergence from a two-year recession will help to lift aggregate growth
in Latin America back into positive territory in 2017. But Brazilian growth will
be meagre, at just 0.5%, and we forecast Mexican growth at only 1.2%, owing to
a Trump-induced downturn. Although social and economic ties between the
US and most Latin American countries will remain strong, the risk of
weakening relations is high. The policies pursued by the president in areas such
as trade and migration will be crucial, although our forecasts assume that
Mr Trump will not follow through on some of his more radical campaign
pledges, such as walking away from the North American Free-Trade Agreement
(NAFTA) if he fails to get a better deal.
Higher oil prices will give some respite
to MENA's oil exporters
Despite the OPEC supply deal, oil prices will remain too low to enable a
significant revival in the oil-dependent economies of the Middle East and North
Africa (MENA). These are continuing to cut spending, which in turn is
depressing private consumption. The most vibrant economy in MENA in
2017-21 will be Iran, which is enjoying a post-sanctions revival, enabling it to
contribute more to regional growth than Saudi Arabia, Israel or the UAE. The
region will also remain the crucible for conflicts stoked by the various
geopolitical interests of global powers, which will stifle prospects for faster
economic growth. Following a dismal performance in 2016—when we estimate
that Sub-Saharan Africa's rate of economic growth fell to just 1%, the lowest
pace of expansion for at least 20 years—growth will pick up in 2017. Prices for
exported commodities will rise and weather conditions will be more clement.
May 2017
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© The Economist Intelligence Unit Limited 2017
4
Global outlook
Exchange rates
The balance of risk is tilted to the
downside for the dollar
Although yield differentials will favour the dollar in 2017-18, we believe that
much of this is already priced in to the foreign-exchange market, which leaves
the dollar vulnerable to disappointing growth or policymaking by the Trump
administration. In the medium term the dollar will weaken moderately against
the euro and the yen, as we expect the Fed to ease monetary policy in 2019 in
response to a recession, taking the policy rate back near the zero lower bound.
Emerging-market currencies will gain some support from higher interest rates
compared with developed markets and stronger commodity prices, but
conditions will become more challenging when Chinese growth slows sharply.
Commodities
We expect the OPEC deal to be extended
to prevent another fall in oil prices
The OPEC deal in November to trim oil production by 1.2m barrels/day for six
months has provided a sizeable boost to prices, but the deal was struck at a
time when oil output was exceedingly high. With oil prices currently under
pressure, owing in part to recovering US shale output, we think that the deal
will need to be extended by another six months in May to prevent a wave of
oil from coming back onto the market and pushing prices down. We currently
expect prices to average US$56/barrel in 2017, up from US$44/b in 2016. We
have again raised our 2017 price forecast for industrial raw materials, which we
now expect to increase by 16.5% year on year.
World economy: Forecast summary
Real GDP growth (%)
World (PPP* exchange rates)
World (market exchange rates)
US
Euro area
Europe
China
Asia and Australasia
Latin America
Middle East & Africa
Sub-Saharan Africa
World inflation (%; av)
World trade growth (%)
Commodities
Oil (US$/barrel; Brent)
Industrial raw materials (US$; % change)
Food, feedstuffs & beverages (US$; % change)
Exchange rates (av)
¥:US$
US$:€
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
3.4
2.3
2.2
-0.8
0.2
7.9
4.4
3.0
3.9
4.1
4.0
3.6
3.4
2.4
1.7
-0.2
0.8
7.8
4.6
2.8
2.1
4.7
3.8
4.0
3.5
2.6
2.4
1.2
1.8
7.3
4.1
1.3
2.6
4.5
3.6
4.2
3.3
2.7
2.6
2.0
1.9
6.9
4.2
0.2
2.6
2.9
3.2
2.8
3.0
2.2
1.6
1.7
1.7
6.7
4.1
-0.8
2.6
1.0
3.8
1.9
3.4
2.6
2.2
1.6
1.7
6.6
4.2
1.2
2.5
2.5
4.5
2.9
3.2
2.4
2.1
1.5
1.6
4.5
3.3
2.1
3.6
3.4
3.9
2.7
3.0
2.1
1.0
1.4
1.6
4.6
3.4
1.8
3.0
2.9
3.3
2.2
3.5
2.6
2.0
1.5
1.8
5.2
3.7
2.6
3.7
3.1
3.1
3.0
3.6
2.7
2.0
1.5
1.8
4.9
3.9
2.9
3.8
3.6
3.0
3.3
112.0
-19.4
-3.5
108.9
-6.8
-7.4
98.9
-5.1
-5.2
52.4
-15.2
-18.7
44.0
-2.2
-3.5
56.0
16.5
1.4
60.0
-4.5
1.3
59.0
-4.8
2.6
61.5
-1.7
-1.4
64.0
2.9
1.5
79.81
1.29
97.56 105.86 121.02 108.76 114.45 105.92 100.48 100.18
1.33
1.33
1.11
1.11
1.06
1.07
1.11
1.13
99.88
1.15
*PPP=purchasing power parity
Source: The Economist Intelligence Unit.
May 2017
www.eiu.com
© The Economist Intelligence Unit Limited 2017