The global economy is on firmer footing as trade rebounds – IHS Markit

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May World Economic Forecast Flash from Global Insight  by  Chief Economist Nariman Behravesh and Senior Research Director Sara Johnson

World Flash

The global economy is on firmer footing as trade rebounds

The incoming data on growth around the globe continue to surprise on the upside. Among the most encouraging trends is the upturn in world trade volumes, reported by CPB, the Netherlands Bureau for Economic Policy Analysis. In IHS Markit’s May forecast, projected 2017 growth rates for Canada, the Eurozone, the United Kingdom, China, and Brazil are slightly higher than in our April forecast. World real GDP growth is now projected to pick up from 2.5% in 2016 to 3.0% this year and 3.2% in 2018.

United States: Look past the volatility in first- and second-quarter GDP growth rates. First-quarter real GDP growth was a paltry 0.7% annualized, as consumer spending stalled and inventory accumulation slowed sharply. There was good news as well: fixed investment and export growth rebounded. IHS Markit expects real GDP growth will bounce back sharply in the second quarter, to 3.4%, led by a pick-up in consumer spending. The fundamentals driving household demand (employment, incomes, asset appreciation, etc.) remain robust. For the past three decades, quarterly GDP data have been distorted by poor seasonal adjustment. Nothing in the data changes the basic picture of an economy growing at an underlying rate of 2.0–2.5%.

Europe: The outlook has brightened—and not just because political risks have diminished. With the victory of Emmanuel Macron in the French presidential election, the existential threat to the European Union has diminished, but political and structural challenges remain. In the next few months, there will be legislative elections in France and general elections in Germany and the United Kingdom. Moreover, the political situation in Italy remains fragile. Yet, the economic outlook continues to improve. Eurozone real GDP increased 0.5% quarter on quarter (q/q; not annualized) in the first quarter, led by solid gains in Spain, Germany, Austria, and Belgium.

China: Solid (but weakening) fundamentals and shaky financial markets. Once again, Chinese policymakers have instituted a set of potentially contradictory policies aiming to support growth while reducing the high levels of leverage in the Chinese economy. The government is accomplishing the first goal with mild stimulus, which helped boost first-quarter growth to 6.9% year-on-year. Chinese authorities are trying to accomplish the second goal via tighter financial supervision and regulation, which has rattled China’s financial markets. IHS Markit has raised the 2017 and 2018 real GDP growth rates 0.1 percentage point. But, we also believe China’s economy will decelerate in the next few years.

Other large emerging markets: While the buzz has faded a little, growth dynamics are the best since 2014. As commodity prices have plateaued and slid a little, the recent euphoria about emerging markets has also faded. Given that world growth is gradually edging up, growth in the emerging world can be expected to strengthen moderately. In India, accelerated remonetization has eased the cash crunch in recent weeks, and spending appears to be picking up. Meanwhile, the Brazilian economy has stabilized and prospects look a little more upbeat. Similarly, the Russian economy is expected to start growing again this year, albeit at a weak pace.

Bottom line: Incoming data continue to point to a strengthening global recovery, but the risks (both upside and downside) remain high.

A Quick Look at the Numbers                  
    2013 2014 2015 2016 2017 2018 2019 2020 2021
Real GDP growth (percent change)                  
  World 2.6 2.8 2.8 2.5 3.0 3.2 3.1 3.1 3.2
  United States 1.7 2.4 2.6 1.6 2.2 2.7 2.4 2.2 2.2
  Eurozone -0.2 1.2 1.9 1.7 1.8 1.7 1.5 1.4 1.5
  Japan 2.0 0.2 1.2 1.0 1.3 1.0 0.7 0.2 1.0
  China 7.8 7.3 6.9 6.7 6.6 6.3 6.1 6.0 6.0
Exchange rates (year end)                  
  Dollar/euro 1.38 1.21 1.09 1.05 1.07 1.09 1.17 1.24 1.26
  Yen/dollar 105.30 120.64 120.50 116.80 115.59 122.75 125.85 125.20 123.48