The year 2017 can be chalked down as a prosperous one for the world economy. Wherever we live, as we celebrate the end of a good year, we also welcome the incoming year, which, by all indications, we hope, will be a better one. The most common measures of economic health viz. output, inflation, employment, and cost of borrowing, all portend that 2018 might be one of the best in this decade, and perhaps, even since the dawn of this century.
The change in mood among the forecasters is evident if we compare the state of uncertainty at the beginning of this year with the prevailing optimism. The election of President Donald Trump, with his promises of reform and radical change in the global commitments of the US, including the Paris Climate Accord, NAFTA, and TPP, was initially viewed with disquiet. This, along with the expected turmoil as EU and UK began their much anticipated negotiations over the Brexit pullout, led to a period of “wait and see” in financial and policy circles. Even the International Monetary Fund (IMF) found itself scratching its head as evident from its July 2017 pronouncement which lowered its forecast for US growth to 2.1 percent for 2017 and 2018 from earlier projections of 2.3 percent and 2.5 percent.
But as soon as it was clear that Wall Street was happy with the moves made by the new administration, there was a surge in business investment, fuelled by executive orders from the Trump administration, robust consumer spending, low interest rates, and exports boosted by a weaker dollar. The US economy grew at three percent last quarter (July–September) and business spending on new equipment went up by an annual rate of 8.65.
IMF soon turned around and recently raised its estimate for global economic growth in 2017 and next year, citing stronger expansion in the first half of the year in the Eurozone, Japan, Asia, and Russia. Its revised estimates are pointing to the uptick in economic activity that started in the second half of 2016 and “gained further momentum” in the first six months of this year. “The global upswing in economic activity is strengthening,” and IMF revised upward its growth forecast to 3.6 percent in 2017 and 3.7 percent in 2018, which are both 0.1 percent higher than projections in July.
In the US, the Conference Board, a business research organisation of 2,000 companies, said that its consumer confidence index hit 125.9 in October, up from a revised 120.6 in September, and the highest reading since December 2000. The index measures consumers’ assessment of current conditions and their outlook for the next six months. Both rose in October.
However, this optimism is not confined to the US economy only. On November 2, the Bank of England, Britain’s central bank, hiked its lending rate from a record low of 0.25 percent to 0.5 percent. The bank had previously lowered the rate in 2016 after the Brexit vote out of fear that the economy would move into a recessionary period given the uncertainty before divorce talks began in March 2017. But, during the last three quarters, consumer spending, one component of GDP, has kept the British economy humming even in the face of slower investment. That along with rising cost of imports has led to mounting inflationary pressures and triggered the first increase in the cost of borrowing since 2007—a move that the Bank of England says was needed to help control pressures on the price level.
The Eurozone countries are also on track, despite some recent hiccups, to end the year with its strongest GDP growth since 2007. President of the European Central Bank (ECB) Mario Draghi announced late last month that an “increasingly robust and broad-based” recovery was the factor behind the decision to scale back quantitative easing and cut the monthly rate of bond purchases to 30 billion euros (USD 35 billion) from the current 60 billion euros at the beginning of 2018.
On October 30, European Commission said that in October, the Economic Sentiment Indicator (ESI) increased further, continuing the upward trend observable since late last year. ESI is a composite index made up of five separate confidence indicators: industrial, construction, services, consumer, and retail trade. The indicator increased by 0.9 points in the euro area (to 114), and by 1.1 points in the EU (to 114.2), reaching the highest levels since January 2001 (euro area) and June 2007 (EU).
These trends are reflected in the emerging markets in Asia, China, and Japan. Many are predicting that with the US economy on its growth spurt, the global multiplier effect is destined to nudge the world economy, including Asia’s, toward its fastest expansion since 2014. It is also expected that in the next five years developing countries will outperform developed countries in GDP growth. China’s economy appears to be rebounding after a few years of deceleration, and this is helping growth in Asian countries. According to an IMF report, “Growth prospects for emerging and developing economies are marked up by 0.1 percentage point for both 2017 and 2018 relative to April, primarily owing to a stronger growth projection for China.”
While there is still some skepticism regarding the level of transparency and reliability of China’s statistics, China’s officials have stepped up efforts to remove any doubts about its policy and performance. Prior to the 19th National Congress of China’s ruling Communist Party that just ended in October, Ning Jizhe, deputy head of the National Development and Reform Commission (NDRC) and head of the National Bureau of Statistics (NBS), “expressed confidence in the ability of China to top the 7 percent GDP growth rate.” This sentiment was reinforced by Zhou Xiaochuan, governor of the People’s Bank of China, its central bank, who forecasted that China’s GDP growth is expected to reach seven percent in the second half of this year while attending the IMF/World Bank annual meeting on October 15 in Washington, DC.
Let me turn now briefly to some of the risks that might derail the rosy projections for the coming year. I would also like to point out the downside of President Trump’s activist policy measures. US growth is partially fuelled by deregulation, weakening of environmental rules, and borrowing. On October 31, a headline in the Wall Street Journal read: “Trump’s Deregulatory Juggernaut is Rolling”. The last financial crisis brought about many of the regulations in place and it needs to be seen if there is another crisis lurking around the corner. To quote Adam Posen, president of the prestigious Washington-based Peterson Institute for International Economics, “The US is headed for a recession in the next two years as excessive fiscal stimulus from the President Donald Trump administration takes the economy into unsustainable territory.” As a candidate, Trump had promised to speed up the US economy to four percent annual growth, and the weaker dollar signals that investors don’t believe he’s going to deliver on that promise any time soon.
EPA has taken initiatives to delay or cancel the Obama-era Clean Air Act and Clean Water Act rules. The weakening of EPA will also have an impact on the health of Americans and their environment. Finally, while American consumers are optimistic, they are saving less, and the savings rate dropped to 3.1 percent in September, a ten-year low. Between 2000 and 2016 the savings rate has oscillated within a narrow band between three to six percent per annum and was never very high. It varied from four percent in 2000 to 11 percent in 2013 but has been declining since. Since US growth is financed by China, this mechanism poses a risk if the latter decides to use its leverage in future due to any friction following US probe of China’s trade practices.
Finally, there are three elements that have the potential to derail global economic recovery: reduced investment in Latin American economies with Brazil and Venezuela in political turmoil; the high debt-to-GDP ratio and lack of transparency in China; and heightened political tensions, particularly in the Korean Peninsula.