Global Chartbook: March 2017

Executive Summary

Growth in the global economy has slowed over the past few years. Specifically, global GDP grew 3.4 percent in 2014, 3.1 percent in 2015 and we estimate that global growth downshifted even further to 3.0 percent last year (Figure 1). However, we forecast that global GDP growth will strengthen somewhat in 2017 and 2018.

The modest upturn in global economic growth that seems to be under way reflects, at least in part, the effects of macroeconomic policy. Although the Federal Reserve hiked rates by 25 bps in December 2015, it subsequently remained on hold for another 12 months to allow growth in U.S. domestic demand to gather more steam. American imports of real goods and services shot up more than 8 percent on a sequential basis in Q4-2016, the strongest annualized growth rate in two years. These American imports are exports for foreign economies, and they help to stimulate GDP growth in those economies.

Policymakers in China have also taken steps to stabilize economic growth in the world’s second largest economy. The central bank reduced its benchmark lending rate through 2015, and the government directed banks to leave the credit taps open last year. Although China faces some long-run issues as it attempts to rebalance its economy away from excessive investment spending to more consumer spending, the policy steps that it has taken over the past two years has helped to stabilize the rate of real GDP growth to between 6 percent and 7 percent. Resilient growth in China has led to stronger growth in the Asian region recently. For example, the year-over-year rate of real GDP growth in Taiwan picked up to 2.9 percent in Q4 from 2.1 percent in Q3. Real GDP in Singapore also grew 2.9 percent in Q4. Although relatively slow by Singaporean standards, this was the highest year-over-year growth rate in the Lion City in two years.

Growth in real GDP in the Eurozone remains steady, if lackluster, at just under 2 percent. To guide market-determined rates as low as possible, the ECB cut its deposit rate into negative territory in mid-2014 and has subsequently left it there. The ECB also maintains a quantitative easing program that has been in place since 2015, and it continues to make liquidity available to banks at attractive terms on the condition that they use it to make loans to the private sector. In that regard, growth in bank lending in the euro area is slowly beginning to increase.

The former high-flying economies of Russia and Brazil struggled during the past two years, but there are indications that both of these economies are reaching their nadirs. Real GDP in Russia contracted nearly 3 percent in 2015, and growth remained negative last year although it appears that economic activity is beginning to stabilize. Brazil fared even more badly than Russia in 2015 and 2016, and real GDP in the largest economy in Latin America currently is 9 percent below its 2014 peak. Fortunately, there are indications that the economy may be bottoming, although signs of genuine recovery in Brazil are illusive.

We are mindful of the downside risks that could negatively affect our forecast of continued global growth. In our view, the most credible downside risks to the forecast are associated with politics and geopolitics. In that regard, there are some important elections this year in Europe, especially in France. A victory by Marine Le Pen in the two-round French presidential election that ends on May 7, although seemingly unlikely, would be destabilizing because it would bring into question the future of economic and political integration in Europe. There are also a host of potential geopolitical flashpoints, from Russia to North Korea to the South China Sea to the Middle East and so on that could cloud the global economic outlook if military conflict were to arise.

The trade-weighted value of the U.S. dollar rose about 25 percent between mid-2014 and the end of last year as market participants began to anticipate the advent of policy tightening by the Federal Reserve. The Fed has already hiked rates once this year, and we look for it to raise its target range for the fed funds rate two more times in 2017 and three times in 2018. On the other hand, we expect central banks in most major foreign economies to refrain from tightening, at least in 2017. Consequently, we look for the greenback to strengthen modestly versus most foreign currencies through year end 2017.This forecast is not just wishful thinking as there are signs that global economic activity is beginning to accelerate. Growth in global industrial production (IP) has been anemic over the past few years, but global IP growth picked up to more than 3 percent in December, the strongest year-over-year rate in more than five years (Figure 2). Stronger IP growth has led to stronger real export growth. Indeed, the volume of global trade also grew in excess of 3 percent in December.

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