Economic Trends

Global economy on an upward trajectory, but caveats remain

BY Richard Summerfield

The pace of growth of the global economy has surpassed earlier estimations with a marked improvement under way across nearly all the world’s major economies, according to the International Monetary Fund’s World Economic Outlook report.

In 2015, the global economy grew a disappointing 3.2 percent, but the world is on track for 3.6 percent growth this year and 3.7 percent next year, according to the IMF. It upgraded its growth forecast by 0.1 percent for this year and next from the last full Economic Outlook in April and the update to its forecasts in July.

However, there are some black clouds on the horizon. The UK’s growth forecast has been cut by 0.3 points to 1.7 percent since April as a result of the consumer-led slowdown in activity in the first half of the year, caused by the pound’s depreciation.

The IMF has also scaled back the expected growth predicted for the US economy due to uncertainty surrounding president Trump’s ability to institute his proposed tax cuts. As a result, though the IMF still expects the US economy to grow this year, the speed of that growth will be reduced. The IMF forecasts that the economy will see 2.2 percent growth in 2017 and 2.3 percent in 2018; in April it projected 2.3 percent growth this year and 2.5 percent in 2018.

“The downward revision relative to April forecasts reflects a major correction in U.S. fiscal policy assumptions,” the IMF wrote in its latest World Economic Outlook report. Because of “significant policy uncertainty,” the IMF felt it could not count on Congress and the president passing lower taxes.

Regardless of uncertainty in the US and other regions, the global economy is still performing above expectations. The pace of its recovery from the global financial crisis of the 2000s is faster than anticipated.

"The picture is very different from early last year, when the world economy faced faltering growth and financial market turbulence. We see an accelerating cyclical upswing boosting Europe, China, Japan, and the United States, as well as emerging Asia," Maurice Obstfeld, an economic counsellor and director of research at the IMF, wrote in a blog post accompanying the report. "The current global acceleration is also notable because it is broad-based – more so than at any time since the start of this decade."

All 15 countries the IMF tracks individually are expected to grow in 2017 and 2018, with China and India set to lead the pack. China is expected to regain the fastest-growing nation crown with 6.8 percent expansion this year, slightly ahead of India's 6.7 percent. However, India is forecast to take the lead in 2018.

Report: World Economic Outlook, October 2017

Outlook for global economies more buoyant than downbeat claims new survey

BY Fraser Tennant

More buoyant than downbeat is the assessment of executives as to the outlook for both global and domestic economies over the next 12 months, according to McKinsey's latest economic conditions survey.

In its ‘Economic Conditions Snapshot, June 2017’, McKinsey notes that executives view geopolitical instability and terrorism as steadily growing threats to the global economy. Furthermore, they consider geopolitical instability to be the risk most often identified as a threat to near-term global growth in every region.

According to the McKinsey survey, the top five ‘potential risks to global economic growth over the next 10 years’ are: (i) geopolitical instability in the Middle East and North Africa; (ii) threat of terrorist attacks: (iii) slowdown in China’s economic activity; (iv) rising income inequality; and (v) volatility across global financial markets.

Additional concerns expressed by executives include transitions of political leadership and changes to trade policy, as well as social unrest (the survey found that respondents in developed Asia, India and North America were the most likely to cite this). Moreover, the number of executives in Asia that identified social unrest as a global risk has more than doubled since March 2017 (up from 14 percent to 32 today) – a figure that has tripled in other developing markets (up from 4 percent to 12 percent).

Despite these continuing threats and uncertainties, executives stated that they remain buoyant about economic conditions in their home countries, with those in Europe more likely to expect improvements. Executives in North America, in comparison, were less confident. At the same time, respondents in emerging markets and developed markets have reported new divergences in their views on trade, company profits and customer demand.

“Respondents are as bullish on the global economy as they were three months ago, with nearly half saying that global economic conditions have improved in the past six months,” states the McKinsey survey. “On the global economy’s prospects, too, respondents are more positive than negative. Nearly equal shares of executives say global conditions have improved and expect conditions will continue improving in the next six months”.

Looking ahead, 39 percent of executives say they are optimistic about the long-term prospects for the world economy, basing their belief on “pockets of growth” scenarios – characterised by high but uneven and volatile global growth. That said, the survey still makes clear that respondents are equally divided on whether or not global conditions will improve during the next few months.

Report: Economic Conditions Snapshot, June 2017: McKinsey Global Survey results

Greek austerity bill approved as eurozone fails to reach bailout agreement

BY Fraser Tennant

In the latest instalment of the saga that is the Greece austerity programme, the country’s parliament has approved a new austerity bill that is intended to assist in the release of the latest tranche of bailout funds from the country’s creditors.

The new austerity bill is worth €4.9bn and is designed to cover the period 2019 to 2021. The Greek parliament has also voted for a simultaneous relief package worth €7.5bn over the same period – to counterbalance the negative effect of pension cuts and a lower non-taxed threshold.

Unsurprisingly, the announcement of the proposed cuts was met with an angry response, with thousands of protesters clashing with police outside parliament.

The relief package also includes: (i) a decrease of tax and income rate, electricity and household grant for vulnerable social groups; (ii) broadening of public investment projects to combat unemployment and support small and medium size enterprises (SMEs); (iii) , opting-out from health coverage cost for weak income groups; and (iv) free access to primary healthcare services. Furthermore, Greece’s Syriza government is committed to implementing the package under the condition that creditors will proceed to the specification of mid-term debt relief measures.

However, following the announcement of the austerity bill and relief package, eurozone finance ministers failed to agree a debt relief plan for Greece – a breakdown in talks which has been blamed on an inability to agree on whether the country will be able to repay its debts in the long run. The failure also raises the possibility of a crisis for the single currency should Greece miss a loan repayment.

“The Greek government has been putting all efforts to drag the country outside the Memoranda in 2018,” says Dim Rapidis, a political and communications adviser. "Creditors share the same view, but the problem is that Germany's minister of finance, Wolfgang Schaeuble, seems reluctant to abide by the creditors commitment to provide debt relief.

"A possible deadlock in agreeing concrete mid-term debt relief for Greece could blow the entire deal. The Greek government, the European Commission and the European Stability Mechanism are pushing the German government to accept debt relief, but the latter wants to delay such decision and discuss it after domestic elections in September 2018," he adds.

Should a decision on debt relief be reached, the European Central Bank may then include Greece in its quantitative easing programme – a move which would give Greece the green light to seek funds from the markets and begin the process of rebuilding its shattered economy.

News: Greece tranche not contingent on IMF in bailout - Greek spokesman

The shape of things to come

BY Richard Summerfield

As 2016 demonstrated, we live in changeable, unpredictable times. Regardless, PwC has offered a bold forecast for the state of the global economic order. In a report released this week, 'The World in 2050', PwC sets out its long-term global growth projections to 2050 for 32 of the largest economies in the world. Those countries account for around 85 percent of world’s GDP.

According to PwC, the global economy could more than double in size. It forecasts cumulative global GDP growth of 130 percent between 2016 and 2050. Much of this growth will be seen in emerging markets, which could grow at twice the speed of developed nations and see their of global GDP rise from around 35 percent to around 50 percent by 2050.

China will most likely be the largest economy in the world, accounting for around 20 percent of world GDP in 2050. In total, six of the seven largest global economies will be found in the emerging markets. Mexico and Indonesia could emerge as significant forces in the coming decades. In order for emerging markets to realise their long-term growth potential, they will need to enhance their institutions and infrastructure. Greater investment in education, infrastructure and technology is necessary. Diversifying their economies will also help with sustainable growth.

By contrast, developed markets such as the US will not fare as well. The US could be down to third place in the global GDP rankings behind China and India. The EU27’s share of world GDP could fall below 10 percent by 2050. The UK could drop to 10th place.

But these various levels of economic growth are dependent on political and economic policy decisions. As John Hawksworth, chief economist at PwC UK, notes, “a populist backlash against globalisation, automation and the perceived impact of these trends in increasing income inequality and weakening social cohesion” will pose a genuine threat to growth, both in the developed and developing worlds.

He continues: “There is no silver bullet to address these concerns. They require determined efforts by governments to boost the quality of education and training, and address perceived unfairness through well targeted fiscal policies. They also require real political leadership to resist calls for increased protectionism and maintain momentum on longer term issues like climate change and global poverty reduction.”

Report: The World in 2050

Greece debt crisis: new survey shows how ordinary Greeks view €86bn European bailout

BY Fraser Tennant

Amid ongoing electoral tensions, domestic debates and political struggle, the beleaguered citizens of Greece have had their say – via a nationwide survey – on the progress of bailout talks, the stability of the Greek economy, the viability of Grexit, as well as the job being done by the Syriza coalition government to keep the country afloat.

Coinciding with a stall in talks on the conclusion of the second review of the Greek bailout (the result of two unsuccessful Eurogroup meetings held in December 2016 and January 2017), the survey highlights what ordinary Greeks think about their status as an under pressure European Union (EU) member state – one which, if it does not receive a new tranche of financial aid under its €86bn bailout by the third quarter of 2017, risks defaulting on its debts.

The German government announced last week that it remained united on the need to stabilise the Greece economy, despite a clear divergence of opinion between Chancellor Angela Merkel's conservatives and their Social Democratic coalition partners on how this can best be achieved going forward.  

Among the key findings of ‘Nationwide Survey in Greece: Bailout Talks, Assessment of Syriza coalition government’ are: (i) the Syriza party remains ahead of the opposition New Democracy party by a narrow margin (Syriza has led the polls since January 2015); (ii) the undecided voters pool is "getting bigger" and has exceeded 30 percent for the first time since September 2015; (iii) the German government is being blamed by 67 percent of Greeks for the big delay in concluding the Greek bailout review; (iv) the majority of Greeks do not consider Grexit to be a viable alternative (71 percent consider the economic policy that has been implemented as "problematic"); (v) the role and stance of opposition parties, especially in the economic filed, is perceived to be “insufficient”, with 70 percent indicating a lack of alternative solutions and policies; and (vi) prime minister Alexis Tsipras is held to be the most popular leader followed by opposition leader, Kyriakos Mitsotakis.

Furthermore, the survey highlights hopes that the bailout programme will be the “last one”, a view held by 44 percent of Greeks.  

With time clearly pressing on all sides, the coming months are likely to see further disruption, with the next Eurogroup meeting later this month, while not exactly make or break, highly significant for the Greek economy and its people, ordinary or otherwise.

Report: Nationwide Survey in Greece: Bailout Talks, Assessment of Syriza coalition government

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