John Greenwood annual economic outlook for 2017
10 January 2017 | John Greenwood
In this article, Invesco Chief Economist John Greenwood provides his annual outlook for the global economy.
Under Donald Trump’s leadership, US gross domestic product (GDP) is widely expected to accelerate. However, I expect only a modest upswing to 2.4% in 2017 and 2.6% in 2018, not a growth rate of 3.5% to 4.0%, as promised in his election campaign. Moreover, most of the incremental growth in 2017 will come not from fiscal stimulus, tax cuts or infrastructure spending, but from the strengthening business cycle upswing which Mr. Trump has had the good fortune to inherit.
US consumer price index (CPI) inflation may rise moderately, but will not be much affected by the fiscal deficit. Unless money and credit growth accelerate, inflation will remain broadly unchanged at around 2%. In October, core personal consumption expenditure (PCE) was 1.7%; core CPI was 2.2% year-on-year. Following the 0.25% hike in the US federal funds range in December, I expect the US Federal Reserve (Fed) will raise interest rates two or three times in the year ahead, taking the target range to 1.00% to 1.25% by year end 2017.
In the Euro-area, the outlook remains subdued in the short term, and still far from robust in the long term. Recently extended to December 2017, at a reduced rate of €60 billion per month from April 2017, the European Central Bank’s (ECB) flawed quantitative easing (QE) strategy continues to fail to gain traction. As a consequence, the arguments for fiscal easing in Europe are becoming fashionable, but European Commission (EC) rules do not offer much scope for change, least of all fiscal expansion backed by monetary acceleration. Meantime, the Italian referendum result shows that political pressures for fundamental changes to the European Union (EU) are gaining ground. • I expect Eurozone real GDP to slow to around 1.2% in 2017, while inflation will continue to fall well short of the target of “close to but below 2%.”
The continued Brexit fallout will slow Britain’s real GDP growth, particularly foreign direct investment (FDI) in the UK. Meantime, the Bank of England’s (BoE) credit promotion policies implemented in August risk adding domestically generated inflation to imported inflation from weak sterling. I expect UK real GDP growth to be 1.5% and consumer price inflation to rise gradually toward 3% during 2017.
In Japan the three-pronged program of Prime Minister Shinzo Abe has failed to reignite growth,while the Bank of Japan’s (BoJ) quantitative and qualitative easing (QQE) program has failed to raise the underlying growth rate of broad money (M2). Consequently I expect Japan’s economic growth rate will remain around 1%, and the economy will continue to hover on the edge of deflation.
Among the emerging economies, there is also a divergence between commodity producers and manufacturers, with the former suffering from weak terms of trade, but the latter still awaiting a fully-fledged upturn in the developed economies that are the major buyers of their products. A number of emerging market (EM) economies have increased their debt levels substantially over the past eight years, requiring domestic or external debt workouts and delaying the process of recovery.