Skip to content
Search AI Powered

Latest Stories

Monetary Matters

Global economic outlook appears brighter as risks recede

Though 2016 brought much that was unexpected to the global economic and political landscape, many of the risks that were looming over the near-term outlook have receded.

After years of economic crises and recessions, the global economy in 2017 seems finally to be firing on all cylinders. It took a long time to get to this point, but this year—for the first time since 2007—all 35 countries in the Organization for Economic Co-operation and Development (OECD) are growing. What's more, nearly three-quarters of them are seeing their growth accelerate.

The BRICs (Brazil, Russia, India, and China) are looking sturdier than in the past: Brazil exited a two-year recession in the first quarter, and Russia, which had seen its gross domestic product (GDP) decline in year-on-year terms for seven consecutive quarters, pushed GDP up past its year-ago level in the fourth quarter of 2016. (See Figure 1.) Meanwhile, China, which has been on a decelerating path, is seeing a modest growth spurt in 2017, with growth likely to outpace that of the previous year for the first time in seven years. The long-troubled European Union is on solid economic footing, with an unemployment rate in June at the lowest level since February 2009. With all of these positive forces in play, the global economic growth rate this year is likely to be the fastest it has been since 2011.


Article Figures
[Figure 1] Annual real GDP growth


[Figure 1] Annual real GDP growthEnlarge this image

Policy risks recede
Economic stability is never the only story, however, and for parts of 2016, it was looking like political developments were poised to spill over into the economic punch bowl. In June of 2016, voters in the United Kingdom shocked the world when a majority unexpectedly voted in favor of leaving the European Union (a decision popularly known as Brexit). This was followed by the U.S. election of Donald Trump in November 2016. Both moments represented the victory of protectionist, anti-immigration, anti-globalist movements, leading some to wonder whether more countries would soon follow—and whether the EU's very existence was under threat. Such outcomes normally dampen growth; notwithstanding their effect on the economies of particular countries, protectionist trade regimes and other trade barriers are commonly understood to inhibit global economic activity.

But in the wave of elections that followed, nationalism seemed to lose momentum. That December, in Austria, Alexander Van der Bellen, a pro-European liberal, was elected president in a convincing victory over the right-wing candidate Norbert Hofer. In March 2017, the Dutch parliamentary election, viewed as a referendum on the far-right populism championed by firebrand Geert Wilders, resulted in the continued majority of center-right Prime Minister Mark Rutte's party. In May, French centrist Emmanuel Macron, at the head of a party (En Marche) founded only one year before, defeated right-wing nationalist Marine Le Pen in a presidential run-off election, and En Marche followed this up in June parliamentary elections by securing a substantial majority of seats. A June snap election called by U.K. Prime Minister Theresa May, far from strengthening her Conservative Party's position, resulted in the loss of its majority, an outcome that could lead to a "softer" Brexit. In the same election, the U.K. Independence Party—whose major issue was championing the U.K.'s withdrawal from the EU—won zero seats. And in September, Angela Merkel won four more years as Germany's chancellor, although the insurgent right-wing AfD party showed new strength. Financial markets generally responded better to victories of pro-trade candidates; for example, when Macron was elected, the euro strengthened, while news of Brexit hit the value of the pound sterling hard.

Of course, the story of political risks to economic growth will never truly end. In Spain, a referendum on Catalonian independence was held in September, but its legitimacy was disputed by the Spanish government and international observers. The result was overwhelmingly pro-independence but was complicated by the nonparticipation of many voters who opposed independence. The ongoing disputes related to Catalonian independence—and the possibility that it would actually occur—are a significant risk to Spain's economic recovery. Looking forward, Italy's next general parliamentary election is slated to happen by May 2018. The degree of success of the anti-establishment, euroskeptic "five-star" movement will be seen as a measure of the public's appetite for a referendum on EU membership, a vote the movement has pledged to hold. And even as Brazil emerges from economic recession, it has landed back in political instability thanks to a corruption scandal. The saga, which has been ongoing for years, played a role in the country's recession and resulted in the impeachment and ouster of former President Dilma Rousseff. Her successor, Michel Temer, has been implicated in criminal charges. As the drama continues to play out, Brazil's recovery remains on shaky ground.

Engines of global growth
A look at the other BRICS, India and China, shows that China's GDP per capita of US$8,137 in 2015 stands in stark contrast to India's tally of US$1,629, despite the two countries' similar populations. (India is projected to surpass China in population in 2022.)

India and China have the two largest populations in the world. That, combined with brisk growth rates averaging 7.2 percent and 9.0 percent, respectively, over the last 10 years, has made them collectively responsible for more than 40 percent of the world's GDP growth over the past decade. Although each faces its own manner of challenges, their economic development has been key in reducing the global poverty rate (proportion of people who live on US$1.90 or less per day) from 35 percent in 1990 to below 11 percent today.

But in China, economic fundamentals are weak, and the country's economic structure includes major imbalances. In particular, consumer demand is suppressed thanks to a high propensity to save; China's financial system is relatively undeveloped and does not make it easy for private enterprises to borrow, resulting in a volatile "shadow" lending system; and Chinese policymakers are still trying to gradually unwind a real estate bubble without causing a "hard landing." China's growth has slowed for each of the last six years, in spite of repeated stimulus measures by the government, and we expect this trend to generally continue for the foreseeable future. But slowing growth in China's case is a symptom of "convergence," an economic concept that refers to countries that are behind in development growing at a faster pace than developed economies. Thanks to its earlier rapid growth, China is beginning the natural process of settling into the more sedate growth pace of a developed economy.

India, meanwhile, suffers from major underdevelopment of infrastructure. Reform efforts have produced disruption; in particular, the November 2016 demonetization, in which Prime Minister Narendra Modi's government suddenly recalled two major denominations of the rupee in a bid to impede tax evasion and counterfeiting, shocked consumer spending amid cash shortages. But this year has seen some promising signs on the reform front. Following more than a decade of negotiation, a unified goods and services tax came into effect in July 2017, replacing a slate of other taxes. The new rule eliminates instances of double taxation and slashes logistical and bureaucratic costs of compliance. If successful, the tax has the potential to improve India's competitiveness and accelerate development. And even though the demonetization measure produced disruption and lowered consumer spending in the short term, a subsequent landslide victory in 2017 for the ruling Bharatiya Janata Party (BJP) in Uttar Pradesh—India's biggest state—puts fresh wind in the sails of BJP's reform agenda.

While risks to the global economic growth outlook still exist, threats that seemed major just one year ago—including trade wars, instability in the EU, and a sharp Chinese economic contraction—now rate as outside possibilities. Barring war or panic, the stage is set for a good few years of broad-based international economic growth.

Recent

More Stories

screen shot of AI chat box

Accenture and Microsoft launch business AI unit

In a move to meet rising demand for AI transformation, Accenture and Microsoft are launching a copilot business transformation practice to help organizations reinvent their business functions with both generative and agentic AI and with Copilot technologies.


The practice consists of 5,000 professionals from Accenture and from Avanade—the consulting firm’s joint venture with Microsoft. They will be supported by Microsoft product specialists who will work closely with the Accenture Center for Advanced AI. Together, that group will collaborate on AI and Copilot agent templates, extensions, plugins, and connectors to help organizations leverage their data and gen AI to reduce costs, improve efficiencies and drive growth, they said on Thursday.

Keep ReadingShow less

Featured

holiday shopping mall

Consumer sales kept ticking in October, NRF says

Retail sales grew solidly over the past two months, demonstrating households’ capacity to spend and the strength of the economy, according to a National Retail Federation (NRF) analysis of U.S. Census Bureau data.

Census data showed that overall retail sales in October were up 0.4% seasonally adjusted month over month and up 2.8% unadjusted year over year. That compared with increases of 0.8% month over month and 2% year over year in September.

Keep ReadingShow less
chart of global supply chain capacity

Suppliers report spare capacity for fourth straight month

Factory demand weakened across global economies in October, resulting in one of the highest levels of spare capacity at suppliers in over a year, according to a report from the New Jersey-based procurement and supply chain solutions provider GEP.

That result came from the company’s “GEP Global Supply Chain Volatility Index,” an indicator tracking demand conditions, shortages, transportation costs, inventories, and backlogs based on a monthly survey of 27,000 businesses. The October index number was -0.39, which was up only slightly from its level of -0.43 in September.

Keep ReadingShow less
employees working together at office

Small e-com firms struggle to find enough investment cash

Even as the e-commerce sector overall continues expanding toward a forecasted 41% of all retail sales by 2027, many small to medium e-commerce companies are struggling to find the investment funding they need to increase sales, according to a sector survey from online capital platform Stenn.

Global geopolitical instability and increasing inflation are causing e-commerce firms to face a liquidity crisis, which means companies may not be able to access the funds they need to grow, Stenn’s survey of 500 senior e-commerce leaders found. The research was conducted by Opinion Matters between August 29 and September 5.

Keep ReadingShow less

CSCMP EDGE keynote sampler: best practices, stories of inspiration

With six keynote and more than 100 educational sessions, CSCMP EDGE 2024 offered a wealth of content. Here are highlights from just some of the presentations.

A great American story

Keep ReadingShow less