The Prospects Service LEADING ECONOMIC ANALYSIS, FORECASTS AND DATA Global Prospects, January 2017 Toplines The world economy remains in a stage of heightened uncertainty, with ongoing Brexit negotiations, Donald Trump s inauguration and upcoming elections in France and Germany having the potential to affect business investment decisions and economic activity. Since his inauguration on January 20 th, US president Donald Trump has already signed a notable number of executive orders on topics such as health care, border security, the freezing of federal government hiring and the withdrawal from the Trans-Pacific Partnership (TPP). Inflation has picked up across most Western economies, with the US Consumer Price Index climbing above the Fed s 2% target for the first time since 2014. While OPEC last year agreed to reduce its oil production by 1.2 million barrels per day in 2017, non-opec supply is likely to increase slightly. Nonetheless, the oil price is expected to rise over the next two years. The Bank of England will publish its quarterly Inflation Report at the beginning of February, setting out detailed economic analysis and inflation projections. Moreover, the UK government promised to publish a white paper outlining its Brexit negotiation plans. Forecast summary Although lower taxes will boost the US economy, this will not be enough to fully offset any impact of trade restrictions and reduced immigration. While we expect growth to accelerate to 2.4% in 2017, this is well below the new government s goal of achieving 3.5% growth. In the light of rising inflation, the Federal Reserve is expected to raise the US base rate multiple times this year. Eurozone inflation has finally started to pick up, but European Central Bank boss Mario Draghi so far sees no need to start the process of normalising monetary policy. Cebr expects growth in the region to be stable but unspectacular over the forecast horizon. We anticipate UK economic growth to slow from 2.0% to 1.0% in 2017. Rising inflation will squeeze household incomes and Brexit-related uncertainty will weigh on business sentiment, thereby limiting investment. India will overtake China as the fastest-growing major economy in South Asia in 2017. America s withdrawal from the TPP is seen as a positive for both countries as it shifts the focus towards the Regional Comprehensive Economic Partnership (RCEP). Global GDP is projected to rise by 2.9% in 2017, up from 2.5% in 2016. Growth is set to accelerate in both advanced and emerging markets.
Economic indicator in focus: Unemployment. Figure 1 Unemployment rate, largest ten economies, latest available value Japan 3.1 China Germany 4.0 4.1 US UK 4.7 4.8 India 6.0 Canada 6.9 France 9.5 Italy Brazil 11.9 11.9 0 2 4 6 8 10 12 14 Source: Macrobond Unemployment rates in the UK and the US have fallen steadily from 8% in 2013 to below 5% at the end of 2016, with both countries essentially at full employment. Brazil s jobless rate is on the rise, while countries such as Italy and Spain are still fighting high unemployment, despite the latter having made progress in recent years. A surprisingly sharp fall in the US unemployment rate to 4.6% in November was partly reversed in the latest available data, and it is unlikely that the jobless rate will fall much further. If the momentum in the economy continues, it will either start to push wages upwards, or alternatively increase the participation rate by enticing discouraged workers back into jobs, both of which would be welcome. UK unemployment dropped to a post-crisis low of 4.8% but Cebr predicts the jobless rate to edge up to 5.0% during the first quarter of 2017 as an expected economic slowdown will make firms more reluctant to hire new staff. High unemployment in the euro area has been one of the most conspicuous features of its fragile economic recovery. Although the region s jobless rate fell to 9.8% in November 2016 (its lowest since mid-2009), unemployment remains stubbornly high in the south with Portugal, Italy, Spain and Greece all posting double-digit unemployment rates. However, unemployment in the Eurozone is likely to fall further in coming months. Across the world s largest emerging market economies, there is some divergence. Brazil has been hit by an economic recession, with the number of people out of work up by three million from a year ago. The jobless rate stands at 11.9%, which is the highest since the introduction of the current data set in 2012. Unemployment is likely to increase further at the start of 2017 despite a return to economic growth. Jobless rates in China, India and Russia are much lower.
Global roundup Europe Inflation in the Eurozone is finally starting to pick up, with Eurostat s latest release of Consumer Price Index data showing the strongest rise in annual inflation for over three years. While higher inflation is welcome news for ECB policymakers in Frankfurt as it adds to calls from some committee members to start the process of normalising monetary policy, it also reduces household s disposable incomes and can therefore lead to a weakening trend in consumer spending. That said, following the ECB s monetary policy announcement in January, bank president Mario Draghi argued that higher levels of inflation had not yet displayed a convincing trend for the ECB to amend its monetary policy stance. On the political front, general elections in France and Germany will top the agenda for 2017. The latest ARD-DeutschlandTrend poll sees Angela Merkel s CDU/CSU as the strongest party (35%). However, SPD s candidate Martin Schulz, who is the ex-president of the European Parliament is more popular among the German population than any other SPD politician has been for a while. Although it is unlikely that he will be able to jeopardise a Merkel win, he might be able to win voters back that have moved to the far-right Alternative für Deutschland (AfD). Elections in Germany will take place in September, while France elects their new leader in May. Marine Le Pen, the leader of France s National Front, has promised an EU referendum within six months of taking office in the unlikely case of winning the election. Cebr expects GDP growth in Germany to slow from 1.8% in 2016 to 1.5% in 2017 while French GDP is predicted to reach 1.3% in 2017 as higher inflation will squeeze disposable incomes. The Bank of England will publish its latest quarterly Inflation Report on 2 February in which it will set out latest detailed economic analysis and inflation forecasts. In its November report, the bank raised the growth outlook for 2017 from 0.8% to 1.4% and Governor Mark Carney has signalled that the bank may raise its forecast again. The latest UK economic data have been positive, with fourth quarter GDP surprising slightly on the upside. However, Cebr projects a slower growth path in 2017 as a combination of lacklustre wage growth and rising inflation limits consumer spending and Brexit-related uncertainty hurts confidence, thereby dampening business investment. That said, the government s willingness to outline its Brexit plan in a white paper will do its part in limiting this uncertainty. 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% Eurozone GDP growth -5.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
North America On 20 January, Donald Trump was inaugurated as the 45 th president of the United States of America. During his first week in office, the new president has already signed a notable number of executive orders on health care, border security, the freezing of federal government hiring and the withdrawal from the Trans-Pacific Partnership. Political relations with Mexico are tense after Mexican President Enrique Peña Nieto cancelled his trip to the White House following repeated remarks by Donald Trump that Mexico would pay for a wall alongside its border with the US. While Washington suggested that it might impose a tax of up to 20% on Mexican imports to finance the wall (White House representative Sean Spicer said that such a policy would generate approximately $10 billion in tax revenue), such a tax on Mexican imports would likely result in higher selling prices faced by US consumers. Donald Trump aims to create 25 million jobs over the next decade with tax reforms, trade, energy and regulatory policies helping GDP to grow at an average annual rate of 3.5%. Under the plan, every income group would receive a tax cut, with working and middle-class families receiving the greatest reductions. The plan also lowers the business tax rate from currently 35% to 15%, aiming to make the US more attractive for investment. Although lower taxes will boost the US economy, this will not partially be offset by any negative impact from trade restrictions and reduced immigration. Moreover, cutting off the supply of cheap imports and the tightening labour market will lead to higher inflation and thereby squeeze household incomes in the medium term. Nonetheless, we expect growth to accelerate to 2.4% in 2017, as a lower income tax and potential infrastructure investments are likely to boost the economy. With regards to monetary policy, the Federal Reserve Bank will continue to normalise monetary policy towards its longer-run neutral rate of 3%, with multiple rate hikes expected during 2017. US consumer prices rose at an annual rate of 2.1% in December, thereby strengthening in favour of arguments of interest rate increases over the course of this year. North America GDP growth 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% -3.0% -4.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Economies covered: Canada, Mexico, United States Source: IMF, Cebr analysis
Asia-Pacific Official data showed Chinese exports declining 7.7% year-on-year in 2016 amid persistently weak global demand. It was the strongest drop since 2009 adding to fears that Chinese economic growth will slow further. With the Trump administration likely to implement some protectionist measures against Chinese goods, it will be difficult for China s exports to recover. Although fourth quarter GDP numbers surprised slightly on the upside, China s economy grew at the slowest pace in over a quarter of a century over 2016 as a whole and we expect India to overtake China as the fastest-growing economy in the region this year. It has to be noted, however, that Chinese GDP figures aren t always reliable. In India, the removal of Rs500 and Rs1,000 banknotes resulted in a temporary consumption shock and payment disruptions, leading to a growth slowdown in 2016. Going forward, we expect GDP growth to accelerate over the next three years, as the demonetisation will likely strengthen India s institutional framework through reduced tax avoidance. The introduction of major sales tax reforms planned to be implemented in April will further boost tax collections. With Donald Trump s abandoning of the TPP trade deal, Asia Pacific nations may increasingly turn to the Regional Comprehensive Economic Partnership (RCEP), a free trade agreement between 16 countries. While the withdrawal from the TPP can be seen as bad news for the Americas, countries such as China and India who were not part of the TPP may benefit from it. Japan s economy grew more than expected towards the end of last year as the depreciation of the yen helped boost export growth. However, private consumption barely rose, adding to concerns that Japan s stimulus drive is yet to translate into increased household spending. Downside risks to Japan s outlook include protectionist trade measures from the US and a global economic slowdown. Asia-Pacific GDP growth 8.0% 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 Economies covered: Australia, China, India, Indonesia, Japan, Malaysia, Philippines, Singapore, South Korea, Thailand Source: IMF, Cebr analysis
Forecast tables GDP growth major economies 2016 2017 2018 2019 2020 2021 Australia 2.4% 2.4% 2.6% 2.8% 2.8% 2.8% Brazil -3.3% 0.3% 1.3% 1.8% 2.4% 2.4% Canada 1.3% 2.1% 1.9% 1.9% 1.8% 1.9% China 6.7% 6.2% 6.0% 5.2% 5.0% 4.0% France 1.3% 1.3% 1.5% 1.6% 1.4% 1.4% Germany 1.8% 1.5% 1.5% 1.6% 1.7% 1.7% India 6.7% 7.3% 7.6% 7.8% 7.5% 7.0% Indonesia 5.0% 5.5% 5.6% 5.8% 5.9% 5.6% Italy 0.8% 0.9% 1.0% 1.1% 1.1% 1.0% Japan 1.4% 1.0% 0.5% 0.7% 0.1% 0.3% Mexico 2.2% 2.0% 2.2% 2.4% 2.3% 2.3% Russia -0.6% 0.7% 2.0% 2.0% 1.9% 1.7% South Korea 2.7% 2.5% 2.7% 3.0% 3.0% 3.0% Spain 3.0% 2.5% 2.4% 2.2% 2.2% 2.0% Turkey 2.9% 3.6% 3.7% 3.3% 3.3% 2.5% United Kingdom United States 2.0% 1.0% 1.2% 1.8% 1.7% 1.6% 1.6% 2.4% 2.3% 2.0% 2.0% 2.1% World 2.5% 2.9% 3.0% 2.9% 2.9% 2.9% Commodity prices 1 131 141 144 135 128 133 Oil prices 2 43 57 60 60 61 61 More UK forecasts can be found by accessing the Cebr databank: www.cebr.com/databank 1 IMF non-fuel commodity index, 2005=100 2 Average of Brent, WTI & Dubai Fateh
For more information, please contact Oliver Kolodseike Senior Economist okolodseike@cebr.com 020 7324 2878