The global recovery is entering its eighth year – sufficiently long for some commentators to suggest that we are due for another recession. That seems premature. 2017 looks likely to be another year of growth for the global economy, and at a rather faster rate than in 2016.
But this is not likely to be the year in which growth finally breaks through, returning to the heady rates seen in the decade before the financial crisis. In other words, activity is likely to remain close to the lower, so-called New Normal levels seen since 2009.
Among the major economies America is best positioned for faster activity this year. That is partly because its recovery faltered in early 2016. With the economy regaining momentum and the new administration committed to tax cuts and infrastructure spending it shouldn’t be difficult to better last year’s anaemic growth of 1.6%.
US economic prospects are certainly looking up, providing Mr Trump with a helpful tailwind as he prepares for his Inauguration on 20th January. Last spring there was a good deal of chatter in markets about the risk of a US recession. That has evaporated and in December the Federal Reserve unanimously voted to raise interest rates and signalled three more rate hikes to come in 2017. The message from the Fed is that the recovery is on track and the US is able to withstand higher interest rates.
No other major Western central bank has sufficient confidence to signal such an increase in interest rates. US interest rates look set to rise in 2017, but others are unlikely to follow quickly.
The pace of growth is also likely to rise in a number of emerging market economies. Some, like Russia, Brazil and Nigeria, will gain from higher commodity prices. Others, like Ethiopia, Vietnam and the Philippines, are on a faster growth track and are benefiting from trade, investment and population growth.
2017 is likely to see Indian growth, at around 7.5%, outpace Chinese growth for the third consecutive year keeping India at the top of the global growth league.
The long slowdown in Chinese growth is likely to continue in 2017 as its economy rebalances away from investment and export-led growth. A shrinking workforce, a product of China’s now-repealed one child policy, is acting as an additional drag on activity. While economists continue to fret about Chinese indebtedness the fears of a hard landing which gripped markets a year ago have eased.
Growth in the euro area is widely expected to ease slightly this year as real wages are squeezed by higher oil and other commodity prices. In the UK Brexit looms large. As the Bank of England’s Chief Economist, Andy Haldane noted last week, the UK economy has proved unexpectedly resilient in the face of the vote to leave the EU. But the Bank, and most independent forecasters, expect Brexit uncertainties to dampen investment and higher inflation to knock consumer spending this year. On average economists see UK growth slowing from 2.0% in 2016 to 1.3% in 2017.
The triggering of Article 50, which seems likely to happen in March, has been so well semaphored by the Government that it seems unlikely, on its own, to have a significant impact on confidence.
What matter most are the long-term effects of Brexit on the UK economy. Before the referendum, six economic forecasting bodies, including the Treasury, the CBI and the London School of Economics, estimated the effect of Brexit on GDP growth. On average, across the various alternatives to EU membership these forecasters saw the UK’s growth rate falling from around 2.3% a year to about 2.1% over the next 14 years.
The fact that we can’t even get a six-month estimate of the effects of Brexit right suggests that 14-year forecasts are pretty speculative. That said, these forecasts provide a starting point for thinking about the impact of Brexit. Reducing the UK’s growth rate by this magnitude would be material but hardly catastrophic. Even at 2.1%, UK growth would be towards the top of the growth league for big industrialised nations.
Every year starts with economists and commentators assessing the risks facing the global economy. Since 2008, the New Year provokes lots of talk of volatility and uncertainty. Euphemisms for “I haven’t a clue” are wheeled out. My favourites are “there is no road map” and “the only certainty is uncertainty”.
A year ago the big worries were a hard landing in China and weakness in emerging markets. Two years ago the twin concerns were emerging markets and a meltdown in the euro area. Fortunately China, emerging markets and the euro area have steered clear of disaster.
2016 demonstrates that even when risks materialise the immediate effects are not always as expected. The UK referendum outcome did not hit the UK economy as hard as many had feared. Mr Trump’s election victory unexpectedly ignited a rally in equities. December’s referendum defeat for Italian Prime Minister, Matteo Renzi, and his subsequent resignation, has caused less political damage than some feared.
National elections in France in May and in Germany in autumn will provide two sources of concerns for financial markets this year. Recent events remind us that betting odds are a fallible guide to election results. Nonetheless, they do reflect the views of those willing to stake money on the outcome. Ladbrokes’ odds are currently pricing a 29% probability of Marine Le Pen, of the far right Front Nationale, winning the second round of France’s Presidential election. The odds give someone other than Angela Merkel a 42% chance of being German Chancellor by the end of this year. Thus these two outcomes are currently priced as being far more likely than Donald Trump becoming US President was a year ago.
In the US all eyes will be on the new US administration. Markets have so far focussed on the prospect that the new administration will bolster growth by cutting taxes and increasing public spending. But the new President also campaigned as a sceptic on free trade. If the campaign rhetoric were to find form in the repudiation of existing free trade deals and new barriers to trade it would add to the drag on world growth from the post-crisis slowdown global trade.
Despite the risks 2017 looks likely to be a bit better for world growth than 2016. The fundamental problem remains, as it has for the last 8 years, that growth rates are stuck below pre-crisis levels. The search for ways of raising growth rates continues.