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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 www.eiu.com © 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%. www.eiu.com © 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 www.eiu.com © 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