The political earthquakes of 2016 have upended conventional thinking about the global economy and have—ironically—brightened the outlook.
The expectation that the incoming Trump administration will enact sizeable fiscal stimulus has increased optimism about US and global growth. This, in turn, has pushed US stock indexes to record highs, while pushing up both interest rates (with a resulting rout in the bond market) and the dollar. A stronger dollar is mostly good news for Europe and Japan, helping to boost both export growth and inflation expectations. On the other hand, much higher US bond yields are bad news for the emerging world, where currencies have already taken a beating in recent weeks, significantly reducing the scope for further monetary easing. Fortunately, these financial market gyrations are occurring at a time when commodity prices are rising and both consumer and business sentiment have improved. IHS Markit believes that the balance of these trends will be moderately positive for global growth, which is expected to increase from 2.4% in 2016 to 2.8% in 2017 and 3.0% in 2018. That said, high levels of political and policy uncertainty could hurt growth in 2017 and beyond.
- 1. The US economy will accelerate—even before any Trump stimulus.
- 2. Europe’s economic momentum will slow a little, primarily because of Brexit and political uncertainties.
- 3. Japan’s economy will gain a little traction, thanks to a weaker yen.
- 4. China’s growth will grind down further, led by a housing construction slowdown.
- 5. Emerging markets will do better, despite recent financial market pressures.
- 6. Commodity prices will continue their upward trend.
- 7. Inflation rates will move up in many parts of the world.
- 8. US interest rates will keep rising—also pulling rates up in some emerging markets.
- 9. The US dollar will appreciate more.
- 10. The level of uncertainty has risen, but the risks of recession remain low.