In 2016, the development of the global economy was characterized by a number of economic and geopolitical crises. 2017 could prove to be even more turbulent. The global economic situation is therefore unlikely to get any better in the new year than it was last year.
In our economic forecast for last year we shared a cautiously optimistic prediction for the 2016 world economic growth path. We also wrote that any such prediction would only work if there were to be no more major external shocks and crises to occur or escalate in 2016. Well there have been shocks and crises in 2016. A. Lot.
2016: Growth in times of crisis
In 2016, the global economy was characterized by a number of critical events:
- The transformation of the Chinese economy into a more strongly consumer and service-oriented growth model had the effect of weakening Chinese economic growth. At the beginning of 2016, this led to considerable turbulence in the international capital and financial markets.
- The decrease in economic growth in Asia curbed the global demand for raw materials. For countries exporting raw materials, this means a drop in exports and weaker economic growth. In Brazil and Russia, these circumstances even led to recession – a decline in gross domestic product (GDP).
- In Europe, the still unresolved sovereign debt crisis had a dampening effect on the investment climate and therefore on growth too. The influx of refugees added further uncertainty. Furthermore, the partial introduction of border controls in the Schengen area affected trade and growth in Europe.
- The decision taken by the United Kingdom in June 2016 to leave the European Union (EU) marked an unexpected step towards disintegration which harms economic development throughout Europe. In addition, the Brexit vote exacerbated fears that this decision could provoke a wave of attempts to leave the European Union in countries such as France, Austria, Denmark or the Netherlands.
- The election of Donald Trump as the 45th President of the United States at the end of 2016 caused considerable uncertainty. If the protectionist measures that Trump announced during his election campaign are actually implemented, this would represent a significant setback for global trade and the international division of labor.
- The outcome of the Italian referendum held on 4 December 2016 led to uncertainty about whether the country would remain in the euro zone.
- Another factor that had a dampening effect on growth were the numerous geopolitical conflicts: the Ukraine-Russia conflict, the civil war in Syria, political unrest in Turkey, North Africa and the Middle East, as well as the disputes between North and South Korea, to name but a few.
All in all, these critical developments resulted in weak growth for the global economy. According to the IMF calculations published in October 2016, the growth rate of global GDP is at its lowest level since the turn of the century if the crisis years of 2001 (bursting of the dotcom bubble) and 2008/09 (Lehman bankruptcy) are not included (see Fig. 1).
2017: World economy still in crisis mode
In all probability, the general conditions for growth and employment will not be any less critical in 2017 than they were last year:
- The growth-dampening effects of the impending Brexit will be stronger if the United Kingdom officially requests to withdraw from the EU in the spring and thus moves one step closer towards Brexit.
- The full effects of the referendum in Italy will also not be felt until 2017.
- The uncertain outcome of the elections in France and the Netherlands will cause concern among investors and consumers, thus weakening economic growth.
- Due to the economic uncertainties in Europe, both the European Central Bank and the Bank of England will continue with their expansive monetary policy. However, most of the money pumped into the economy will flow into the financial markets rather than the real economy. This heightens the danger of speculative bubbles forming. If they burst, this would lead to an abrupt economic downturn.
- In 2017, many emerging countries will continue to grow at a low level similar to in 2016.
There is additional uncertainty among investors and consumers due to the change of government in the USA in January 2017.
- No one can reliably estimate which economic and foreign-policy approach the 45th President of the USA will adopt. This uncertainty will have a negative impact on the global investment climate and thus weaken global growth.
- Donald Trump outlined his protectionist intentions during the election campaign. Among other things, he promised high tariffs on Chinese and Mexican imports as well as the renegotiation or even the termination of existing free trade agreements. Such measures serve to restrict global trade and weaken growth in all of the national economies affected. This would give the rise in protectionism seen since the end of 2015 an additional boost.
- The election campaign pledge of cutting taxes while at the same time increasing government investment expenditure would cause the government deficit in the USA to rise sharply. The higher demand for loans associated with this would lead to a rise in interest rates in the USA.
In turn, higher interest rates in the USA have effects on the rest of the world: if investors are able to achieve a higher return in the USA, they will withdraw their capital from other countries. It will then become difficult for a number of highly indebted developing and emerging countries to obtain loans. This heightens the danger of state bankruptcy. This also applies to the southern European crisis countries, most notably Greece and Italy.
Are there any rays of hope?
But all of these uncertainty factors and growth-dampening developments aside, there are also some positive tendencies:
- Crude oil prices stabilized during the course of 2016. While a barrel of Brent crude cost less than USD 30 at the start of the year, this price was up to around USD 50 by the end of 2016. For countries exporting crude oil, this means an increase of export revenues and therefore an improvement of their economic situation.
- Following the deposing of Dilma Rouseff, Brazil has become more stable politically. Based on this and rising raw material prices, it can be assumed the country has pulled through the worst of the recession.
- In Europe, there has been a drop in refugee migration. This is likely to reduce uncertainty among investors and consumers. Both have a positive effect on the willingness of companies to invest and thus strengthen economic development.
- The credit-financed investment program announced by Donald Trump increases growth and employment in the USA – in the short term at least. The associated income gains serve to raise consumer demand in the USA. This demand also includes foreign products, meaning that exports from the rest of the world to the USA increase. In order to carry out public investments worth billions, too, the USA would be dependent on further imports from overseas. Economic growth in the rest of the world is thus strengthened.
- With regard to the USA, it is ultimately possible that the protectionist measures announced are not implemented at all. This economic isolation would raise prices in the USA, weaken American competitiveness, provoke retaliatory measures in the rest of the world and therefore have a harmful impact on economic growth in the USA. It is therefore highly doubtful as to whether the world’s second-largest export nation will really take a hard-line protectionist approach.
What will remain?
The global economy will remain in crisis mode in 2017. An increase in real global GDP of much more than three percent is not expected. However, a prerequisite for this is that none of the geopolitical crises escalate and that none of the stock markets collapse – such an exogenous shock would lead to an economic collapse.