This analysis will be based on the data up to 3Q2016. For 2017, there are several reasons why the global economy may slowly improve. Commodities price has started to stabilize. Oil price has reversed up from the slump in 2015. China’s data has been showing positive signs. UK also proved that Brexit fear is slighted exagerrated as latest serials of data turned out to be positive. However there could be some weaknesses in Europe and Japan. US economy could be improving, although not significantly assuming gradual rate hike between 4Q2016 until 2017.
We will first dicuss US’s prospect then the prospect of the global economy. US year-on-year GDP growth is still weak in 2016 (below 2%). This is coupled with “still far from 2% target” inflation. On the other hand, instead of giving stimulus like the rest of central banks, the fed plans for gradual hike. This could give pressure for US growth in 2017. However as China’s economy and commodity prices have started to improve, US may get some support for growth. Therefore US outlook seem to be slightly positive in 2017.
For explanation of 2017 global outlook :
I. Commodities price has started to stabilize
- Bloomberg Commodity Index (source : bloomberg)
- WTI Crude Oil Price (source : NASDAQ)
With the OPEC countries and Russia (based on last meeting in Algeria) agreeing to be cooperative in the need of price stabilization, next year oil price outlook could be positive. This positive outlook on commodities price will support growth on commodity exporting countries. Most of emerging market, whose economy mostly supported by commodities, will gain from this condition.
II. China has started to slowly recover
Although the overall growth trend within 1 year is still negative, the July growth (6.7%) has slightly beaten market forecast of 6.6%. This might show that China has started to erase expectation of further slowing growth, although significant growth improvement in 2017 would be unlikely. China’s import growth has also gone to positive territory in August 2016 from nearly 2 years of declining imports yoy growth.
- China’s imports yoy growth (source : self-generated graph from CEIC data)
This could mean improving global demand from China which is a good sign for global economy.
III. Brexit impact on UK proved to be limited
- GDP growth post Brexit turned out to be positive
- UK Composite PMI (source : )
Business contraction in July has bounced into expansion in August (more than 50 indicates expansion). These data gave positive outlook on UK’s economy.
IV. Euro and Japan weaknesses in 2017
Both countries already have low interest rate ( euro 0% and japan 0 until -0.1%) which have been reduced during 2015–2016 to support their stimulus program. The stimulus however proved to be not effective enough to stimulate growth.
Moreover these countries are still far from their inflation target. The low interest rate will make future monetary stimulus to be harder to implement. This uneffectiveness of monetary stimulus could be caused by the still existing problems that have not been completely extinguished. Euro area has large bad debts (non performing loan) problem, especially in Italy. Japan has low consumption and too strong currency rate. These problems may accumulate in 2017.