2017: An Inflection Point for the World Economy?

Since the global financial crisis of 2008, the world economy has been running on life support. However, economic data and macro indicators in 2017 has been promising and the year might turn out to be an inflection point into a new round of economic growth.

Global unemployment and inflation rates of the world’s major economies are at or close to target rates of 4% and 2% respectively. At the end of 2016, unemployment in the United States fell to 4.6%, slightly above the target unemployment rate of 4% while inflation rose to 1.7%, within touching distance of the 2% target. Unemployment and inflation data in the Eurozone has been encouraging too, especially in the United Kingdom. Elsewhere in Brazil, Russia and India, economic data has been promising especially in the first part of 2017. Whether in developed economies of developing economies, these trends are highly encouraging.

At an IMF meeting in November 2013, former United States Secretary of the Treasury Lawrence Summers remarked that “long term growth stagnation” could be the new normal that would plague our generation. 4 years on, policymakers and workers worldwide are hopeful that Secretary Summers is wrong.

Strong Dollar Index, Eurozone Rebounds, Inflation in the UK

President Trump inherited an economy with relatively strong fundamentals and following the election, the dollar index entered into a stage of rapid appreciation. We believe that the dollar has entered a third appreciation cycle since the election of Barack Obama as President in 2008. Earlier in March, the Federal Reserve took the step to hike interest rates, which led to the reversal of international capital flows back into the United States which will slowly push up the dollar exchange rate.

At its monetary policy meeting on 9 March, the European Central Bank kept deposit facility rates at -0.40% and refinancing rates at 0.00% and confirmed that it intended to continue making purchases under the asset purchase programme at the current monthly pace of EUR 80 billion until the end of March and then at a monthly pace of EUR 60 billion from April to December 2017.

In his introductory remarks, Mario Draghi reaffirmed that “a very substantial degree of monetary accommodation is still needed”. However, he did not reiterate that the ECB could, if necessary, use “all the instruments available within its mandate”. At the Q&A, Mario Draghi stated that this omission sought to show that the urgency around deflation risk had faded.

Across the English Channel, the Consumer Price Index in the UK in February came in at 2.3%, against economists consensus of 2.1%.

Is the end of Lawrence Summer’s predictions in 2013 in sight?

A lot depends on President Trump

Because of the size and influence that the United States has on the world economy, policy actions by the United States Government will have ripple effects across the world (look at the TPP for example). President Trump’s election had a fundamental impact on the world economy, and has the potential to be the single most important and influential factor in global economic and financial markets in 2017. If President Trump reduces corporate income tax, personal income tax and increases public investment policy, the era of low interest rates, low investments and low growth may finally be replaced by higher interest rates, higher investments and higher growth.

As the dollar features as the main denomination of international trade and commodity prices, upward pressure on the dollar in an appreciation cycle means that commodity prices may be subdued, which may not necessarily mean a bad thing for countries to invest in infrastructure and development projects, something that world leaders have acknowledged as the next big issue on the global policy agenda.

Conclusion

As the global level of aggregate demand and inflation (and expectations) while unemployment falls, we may see the world economy returning to growth in 2017 and beyond. As Chinese President said in his speech to the 2017 Word Economic Forum, “history tells us that the development of human civilization has never been smooth. Drastic action and confidence is required to move towards a brighter future”. Drastic monetary policy actions were undertaken worldwide post 2008, are we on the cusp of a new age of growth?

---

WRITTEN BY CHETAN SHARMA FOR BESA

PLEASE DIRECT ANY INQUIRY TO AS.BESA@UNIBOCCONI.IT