Global Economy to See Major Shift in 2017

The global economy is set to see a significant shift in 2017 as it moves from ever easier monetary policy to fiscal stimulus and as the oil price recovery becomes entrenched. This could lead to an about-turn in the global economy, starting in Advanced Economics (AE) with higher growth and inflation. As such, 2017 could be the year when the new normal turns old.

According to Qatar National Bank analysts, the year 2016 was dominated by an environment of multi-year lows in oil prices and global bond yields as well as political surprises. Much of this is set to change in 2017, where they see five key themes emerging, Reuters reported.

First, QNB expects a shift in policy focus from monetary to fiscal in AEs. Second, the bank expects expansionary fiscal policy in the US to push the Fed to tighten monetary policy at a faster pace, raising US yields.

Third, higher US interest rates are expected to increase the risk of capital flight from EMs. Fourth, a recovery in global oil prices as the market rebalances with OPEC production cuts and strong demand growth.

And finally, QNB expects heightened political risk with the rise of populism and important elections in Europe. These themes predominantly offer positive growth dynamics for advanced economies , but could act as a drag on growth for emerging markets.

In Europe, draft budgets submitted to the EU point to stimulus and spending tends to rise in election years. Both Japan and the UK have announced increased infrastructure spending. The fiscal stimulus in advanced economies should help raise growth to 1.7% in 2017 from 1.6% in 2016.

On the global recovery in oil prices, QNB expects oil prices to average in the range of $55-60/barrel next year, depending on the extent to which the recent OPEC agreement is implemented. The agreement committed to 1.2m b/d of cuts within OPEC and 0.6m b/d from non-OPEC.

Overall, EMs should benefit from the recovery in oil prices, while higher oil prices should act as a drag on growth in the US and eurozone, which are net oil importers. However, higher oil prices are unlikely to offset the more powerful growth drivers.

In 2017, ongoing Brexit negotiations and elections in France, Germany, Netherlands and potentially Italy all pose downside risks. Election victories by populist candidates could increase isolationism and protectionism, calling into doubt the very existence of the EU and the eurozone. This would increase uncertainty, financial market volatility and could negatively impact growth.