The International Monetary Fund (IMF) is forecasting that the global economy will grow by 3.4% in 2017 and 3.6% in 2018. In its World Economic Outlook, the IMF stated, “Preliminary 3rd quarter growth figures were somewhat stronger than previously forecast in some economies, such as Spain and the United Kingdom, where domestic demand held up better than expected in the aftermath of the Brexit vote”.
However, the IMF commentated also, “There is a wide dispersion of possible outcomes around the projections, given uncertainty surrounding the incoming US administration and its global ramifications”. In producing this forecast, the IMF have made a number of assumptions about the policies Donald Trump’s new government will pursue, which at this stage are uncertain.
The IMF forecast that the US economy would grow by 2.3% in 2017, up from a previous estimate of 2.2%, whilst the forecast for 2018 has been raised to 2.5% from 2.1%. Although Donald Trump’s proposed tax cuts and infrastructure spending plans are on the upside for growth, there are a number of downside risks, including whether the new administration will introduce protectionist economic policies. In the election, Donald Trump talked about imposing border taxes on a number of companies planning investment in Mexico. He also talked about renegotiating trade agreements.
Corporate tax reform proposals in the US could prompt significant expectations for further strengthening of the US Dollar, driven by the potential impact on trade and the repatriation of corporate profits held overseas. However, there is still great uncertainty around the details, timing and potential impact of the incoming administration’s policies. Donald Trump signals a period of political change, but there is significant uncertainty.
The US economy is continuing to perform. The US unemployment rate rose to 4.7% in December 2016 from a nine-year low of 4.6% in the previous month. The number of unemployed persons was almost unchanged at 7.5 million, while the labour force participation rate increased by 0.1% point to 62.7%.
The latest US inflation rate, as measured by the Consumer Price Index (CPI), for the 12 months ending December, is 2.1%, an increase of 0.4% from the previous month.
The latest minutes from the Federal Reserve (Fed) emphasised, “substantial uncertainty” about the fiscal policy ahead. Despite this comment, the Fed increased US interest rates in December and has indicated that there should be 3 further interest rate increases during 2017. The gap between US and non-US interest rates are expected to widen during the coming year.
The IMF has raised its forecast for the UK’s economic growth to 1.5% in 2017, compared to 1.1%, which it was previously forecasting.
UK inflation, as measured by CPI, rose 1.6% in the year to December 2016, up from 1.2% in November. The main reason for the sharp increase was higher costs for imported materials and fuels. This is the highest CPI has been since July 2014; however, the annual rate remains below the Bank of England’s target of 2%.
Separate producer price inflation figures showed that the prices of goods bought from factories rose 2.7% in December compared with a year ago, as manufacturers start to pass on the higher input costs they are facing following the fall in Sterling.
Theresa May has announced that the UK will opt for a “hard Brexit”, in that the UK will leave the European single market, however, the government promised to push for the “greatest possible” access to the single market. The UK will also seek global trade opportunities. Sterling rallied on the announcement because the Brexit deal will be put to a Parliamentary vote and Theresa May stressed the UK’s global intentions. It is still too early to say what the long-term impact of Brexit will be, and, therefore, Sterling will probably remain volatile.
The UK economy is progressing, with UK unemployment falling by 52,000 to 1.6 million in the three months to November. The jobless rate was steady, at an 11-month low, of 4.8%. According to the Office for National Statistics, house price inflation picked up to 6.7%, in the year to the end of November.
Although the economy is progressing, the Office for Budget Responsibility (OBR) has said that the Chancellor, Phillip Hammond, may find it impossible to balance the books in the years ahead without increasing taxes or cutting spending. The OBR concluded that the public finances were, “on an unsustainable path”. The OBR stated that the increased spending on the NHS and state pensions is likely to grow faster than the economy as a whole.
The IMF is projecting that the Eurozone economy will grow 1.6% in both 2017 and 2018, slightly down from an estimated 1.7% in 2016. The Eurozone’s slow economic recovery has continued, with GDP growing in the 3rdquarter steadily at 0.3%, quarter-on-quarter, which follows 0.3% growth in the 2nd quarter and 0.5% growth in the 1st quarter. However, a number of risks may surface. These include question marks about the banking system and geopolitical risks, with upcoming elections in the Netherlands, France and Germany.
The IMF expects the Japanese economy to grow 0.8% in 2017, up 0.2% from its estimate in October. Economically, Japan has performed relatively well in the 4th quarter, benefiting from the Yen weakening following Donald Trump’s victory in the US election and a modest pick-up in global growth that supported business confidence. The Japanese economy, which has a strong manufacturing base, should benefit from an improving outlook for the global economy. However, wage growth continues to constrain private consumption. The Bank of Japan is expected to support the economy through continuing its loose monetary policy.
The IMF forecasts that the Chinese economy should continue to slowdown, but expects it to be less pronounced. The IMF expects China to grow 6.5% in 2017, having previously predicted 6.2%.
The IMF also believes that the declines in Russia and Brazil will probably end, although neither country is expected to experience strong growth.
The IMF has also downgraded its India growth forecast by 0.4% to 7.2%. The IMF believes that consumption in the country should slow due to the government’s recent demonetisation drive.
Brent crude has continued its recovery and is now trading at over $54 per barrel. The increase in the oil price is helping to drive global inflation higher.
What a difference a year makes. This time last year, the markets were worrying about a global economic slowdown and deflation, led by China. Roll on 12 months, following Brexit and the election of Donald Trump, the markets are looking forward to reflation, i.e. faster global economic growth and higher inflation, led by the US. However, it must be pointed out that risks to this positive outlook remain in view. Donald Trump’s election has surprised everyone and no one is quite sure what policies his administration will implement and what will be the impact of these policies on both the US and global economies. There also remain geopolitical risks in Europe and worries over the banking system in the Eurozone. Finally, one must not forget China and how their economy responds to the new US administration.