Global outlook for 2017: A loss of balance in a watershed year?

Once more into the breach…

Economists found themselves in the spotlight in 2016 but it was not a positive experience. It felt to me that distrust of the profession hit record levels. It is therefore with some trepidation, especially as the outlook appears more uncertain than I can remember, that I am sharing my thoughts on how the global economy might perform in 2017 and what issues businesses will likely need to focus on as a result.

…in a changing economic…

There are a range of factors complicating the analysis of the global economy for 2017 and beyond:

• China embarked on a programme of reform several years ago – it was probably the first country to cite “rebalancing” as one of its objectives – and hence we have a reasonable set of historic data to draw on as we look forward. However 2017 looks to be a potentially pivotal year in the reform process. 2016 saw the Chinese Government loosen policy in certain areas and the pace of reform appears to have slowed in anticipation of further political change this year. How Chinese domestic policy evolves will be very important in shaping the outlook both for China and its key trading partners.

• The arrival of a new President of the USA in 2017 means that there is less certainty about the future direction of the American economy than in recent years. The start of the Trump presidency in the USA does seem likely to lead to shifts in both domestic and foreign policy and not just in the economic policy area. Campaign rhetoric is not necessarily a good guide to policy once in power, but the proposals that were made suggest both potential stimulus and possible drags on economic activity. However, the balance appears to be likely to lead to an economic boost, at least in the short to medium-term.

• The EU is at a critical point in its history with one of its larger members on a path to leave the union, most likely in 2019. But this is not the only challenge facing the bloc. In recent months a banking crisis in Italy, renewed concerns over the Greek economy and hints at tension about the monetary policy being employed by the ECB mean that the European economy is coming under renewed scrutiny. The real challenge could well be for policy makers to free up sufficient time, given all the political challenges they face, to renew the drive to reform the European economy.

• After what felt like a period of relative stability, shifts in the prices of oil and other commodities and movements in exchange rates have assumed greater significance in recent years. Movements in these areas shift value between geographies and hence impact corporate performance and plans. While there are signs of a slight uptick in commodity and oil prices, the changes are unlikely to be of a scale enough to provide more than a slight boost to growth in emerging markets and some of this will be offset by the impacts of a strong dollar and higher US interest rates on dollar denominated debt.

…and policy landscape.

Recent political developments in the USA and UK hint at what may turn out to be the source of even more change than the macro shifts described above: a shift in the broad policy landscape.

I have spent all my working life as an economist under the envelope of “the Washington Consensus” shaping policy. Broadly, the prevailing view has been that governments cannot change the course of economic activity in an effective way and hence they should get out of the way and let markets allocate resources.

The election campaign in the USA featured a number of challenges to this approach and this has continued since November. In the UK, Teresa May talked in her first speech as Prime Minister about building an economy that works for everyone. She followed this up in her speech at the Conservative Party Conference stating her vision of government as a force for good in the economy. These shifts are in line with changes in thinking called for by some of the major economic organisations, such as the IMF, World Bank and OECD, all making the case for considering greater emphasis on fiscal policy and public investment to generate economic growth. It does seem that this may be a watershed year that could provide us with the first clues as to potential shifts in policy and what the implications of these might be.

Look for a shift in the balance…

Based on what we know and expect, my view of 2017 is for:

• Faster growth in the USA as the weight of policy appears to support a stimulus for growth although the sustainability of this boost is far from clear at this time;
• The dollar’s strength to continue underpinned by this stimulus and associated increase in the costs of borrowing while its major trading partners continue to adopt relatively looser monetary policies;
• A gradual easing in China as reform returns and the rebalancing agenda mutes overall growth rates;
• No real change in the Eurozone with growth of around the 1.5% range absent any additional policy boosts to activity;
• Gradual but not major improvements in global growth as commodities and oil prices edge upwards;
• Little if any growth in trade flows as global economic growth only changes slightly and the prospects for any new major trade deals appear limited.

This will mean that the balance of the global economy shifts somewhat.

• Firstly, we will see more growth in aggregate across the developed markets, led by the USA, while growth in developing markets is likely to be relatively flat as China slows offsetting a slight recovery elsewhere.
• Secondly, we can also expect more focus on the appropriate balance of activity at home and abroad. The implications of the politicisation of globalisation and especially the uses of offshoring and migrant labour are likely to start to become clearer in 2017.

…which means geography should be front of mind.

I believe 2017 could be a watershed year when we see long-standing pillars of the global economy starting to fall if not crumble. The consensus around market led policy and the drive to globalise look to be particularly vulnerable in a world in which growth is only picking up slowly and the nation state appears to be reasserting itself.

Businesses should use 2017 to review their geographic profile in the light of potential future changes. These changes include a shift in the balance of growth with a faster growing US economy as the main driver, but also the politicisation of location and resource decisions, anticipating policy change will be important. Brexit has captured much of the attention in the UK but this is just one of a number of issues driving potential shifts in policy.

Supply chains will be central to any review of geographic spread but so will tax arrangements and operating models. There are likely to be elements of both carrot and stick in future arrangements as Government’s look to influence corporate decision-making with a mix of threats and incentives. It will be important to get ahead of the curve, form a view as to the ideal shape of the business for commercial purposes and use this as the basis for managing engagement with the political process.

@MarkGregoryEY

markgregoryeconomics.ey.com

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