by Chief Economist Nariman Behravesh from IHS Global Insight
Paradoxically, while political uncertainty is high, near-term economic risks are relatively low. There is no shortage of political and policy imponderables, including the paths of Brexit and US regulatory, tax, and trade policies. Yet, in the United States and Europe, confidence is rising (as measured by the Markit purchasing managers’ indices—PMIs—and other surveys). Recent improvements in global economic fundamentals—stronger growth in the United States, dollar appreciation, and higher commodity prices—help to explain this paradox. IHS Global Insight expects global real GDP growth to pick up from 2.5% in 2016 to 2.8% in 2017 and 3.1% in 2018, reaching its fastest pace since 2011.
United States: “Animal spirits” have revived—but the impact on growth may be limited. Consumer and business optimism and stock market indexes have surged upon expectations that the incoming Trump administration and a Republican-led Congress will cut taxes, roll back regulations, and make it easier to repatriate profits. Nevertheless, the boost to growth may be limited, because the link between sentiment and spending is tenuous, and because the actual policies enacted may fall short of expectations. Moreover, recent increases in interest rates and the US dollar’s exchange rate will act as drags on economic growth.
Europe: For the moment, economies have shrugged off politics. The Markit PMIs and the European Commission’s measures of business and consumer confidence have shown significant gains. Yet, the political environment could be increasingly problematic for growth in 2017, when general elections are due in the Netherlands, France, Germany, and likely Italy. The Brexit process has had almost no effect on growth prospects so far, but negotiations are likely to prove difficult. Meanwhile, accommodative monetary policies and weaker currencies are supporting growth.
China: The economy’s growth rate will slow, not plunge. Economic activity maintained momentum in late 2016, while inflation continued to rise. IHS Global Insight continues to forecast that real GDP growth will slow in 2017 and 2018, reflecting a correction in the housing market and slower growth in automobile sales. The government will likely be more proactive in policy stimulus in 2017, when the five-yearly Chinese Communist Party Congress meets. It will favor growth stability over reforms, and it will try to strike a balance between mild monetary stimulus and not letting its currency fall too fast.
Other large emerging markets: While the global growth environment is improving, some economies are not enjoying the ride.Stronger world growth and rising commodity prices will boost some of these economies. Yet, rising US interest rates and a strengthening dollar pose some risks. Plunging currencies and capital flight are problematic for central bank policy and economic growth. Turkey is a prime example. In India, the government’s anti-corruption campaign has created a severe cash crunch (by banning the use of large-denomination bills).
Bottom line: So far, increased political and policy uncertainties have not become obstacles to growth—but going forward, a lot will depend on the actual policies pursued by governments in the United States, Europe, China, and elsewhere.