What will 2017 bring?

The global economic environment can be described as lukewarm in 2016. There was no marked deterioration in the performance of advanced economies, but any signs of sustainable improvements were few and far between. And clearly overshadowing economic developments this year were key political events, particularly in the UK and US, and more recently the Italian referendum. These, and yet more political events, will likely define economic outcomes in 2017 and beyond.

Nonetheless, we expect that economic activity will improve modestly in developed and emerging economies alike in the coming year. The problem is that this expectation has been in place at this time of year for much of the postfinancial crisis period. And to date these expectations have disappointed, with extraordinary policy accommodation required to support rates of economic growth that are in the main below trend.

This is evident in the International Monetary Fund (IMF) having to consistently downgrade its global real GDP growth forecasts. Indeed its forecasts over the past five years have consistently looked for a significant rebound in GDP growth toward 4.0% pa, which has failed to materialise. The IMF’s latest round of forecasts, contained in the October release of the bi-annual World Economic Outlook, are significantly more circumspect. Economic growth is expected to accelerate from an estimated 3.0% in 2016 to 3½% in 2017 (see following chart). Emerging markets are anticipated to expand by 4½%, whereas developed economies are forecast to grow at just 1¾%. This underscores the ongoing importance of developing markets to global growth. For example, China’s economy will have been responsible to just over a third of global economic growth in 2016. By contrast, the US economy contributed less than 20%.

Global growth: successive IMF real GDP forecasts
Will 2017 be any different?


Source: IFM Investors, IMF October 2016.

Lower potential growth rates are expected to persist, particularly in most advanced economies. Therefore, even modest improvements in cyclical economic growth will see continued improvements in labour markets and higher rates of inflation. This should reduce the pressure on monetary policy to bolster growth, which itself is fortuitous as there is the realisation that monetary accommodation has likely reached a bound of what it can constructively achieve. Ideally, at least some of this burden will shift to fiscal policy. This is as more governments’ budget balances have improved enough for policy to become less restrictive.