Global Economic Uncertainty to Continue in 2017

Investors sound optimistic about a breakout for the world economy next year, but for all the talk of huge tax cuts from the incoming US presidency of Donald Trump, the economic outlook looks similar to 2016: uneven and unspectacular.

Accelerating inflation and a soaring US dollar as the Federal Reserve raises interest rates are also risks to the economic balance, magnified by that pending stimulus, Reuters reported.

Much may hinge on financial markets, which for a brief period around the start of this year looked like their fretting over China might throw the global economy off track. There is plenty more uncertainty about trade with China now than then.

Many of the several hundred professionals polled by Reuters worldwide say the global trade slowdown during the world economy’s lukewarm recovery from financial crisis that started nearly a decade ago could worsen.

Emerging economies will remain vulnerable. Brazil’s persistent, crippling recession is way out of line with its soaring stock market, and much of Asia will grow below potential, putting the latest global growth forecast for the year ahead at 3.2%, less optimistic than it was this time last year.

For the developed world, meanwhile, it has been productivity gains that have been lacking for so long and policymakers remain at a loss on the reasons why, and how to remedy the problem.

The US jobless rate is already down to 4.6% and hiring slowing, so economists say improving growth in output per worker will be crucial for prosperity.

“Trump and his team have promised growth of 3.5% to 4% or more, which we see as ‘magical thinking’ unless accompanied by accelerated productivity growth,” noted Michael Carey, US economist at CA-CIB in New York.

The most optimistic US growth forecast for any point in 2017 in a Reuters poll taken a month after Trump’s shock election victory was 3.8%, well short of the peak rate in a business cycle that is already mature by past standards. The consensus, in line with the Fed’s view, is a little above 2%. That is similar to a Reuters poll outlook for 2016 in a series of forecasts made a year ago on growth, rates, inflation and foreign exchange that were broadly accurate.

 Business Confidence Blunt

Strategists foresee a rising US dollar, already at a 14-year high, and US Treasury yields edging up as the Fed follows through with more rate hikes next year. But Wall Street isn’t convinced yet there will be three more.

A rising dollar may blunt future performance of US companies, many dependent on international business for revenue. Many of their share prices trade near record highs, but propped up by buyback schemes and stimulus, not business investment.

Dollar strength, weakening other currencies, will also influence how emerging markets manage relatively higher inflation, as well as wilting business confidence.

But for all the talk of trade barriers, oil prices rising on supply cuts, and planned US tax cuts and infrastructure spending, the global inflation outlook hasn’t changed much, even if the Fed is sounding more worried about it.

The Fed’s preferred inflation gauge is forecast to average 1.8% next year, in line with its own view.

The world’s second largest economy, China, has turned up slightly this year, but built on a government borrowing binge and a partly-managed weaker currency. Growth is forecast to slow, and tensions between Beijing and the incoming Trump administration are already flaring.

The rise of Trump and the triumph of Brexit had their roots in the global financial crisis of 2008. Eight years on, the world economy has still to fully get past that shock to confidence—people are nervous, some angry, and many are seeking novel solutions to their problems. Next year, there’s scope for more uncertainty with elections in France and Germany to name just two.