Global Economic Outlook - November 2017

Editorial

With its title, ‘A hint of spring is in the air’, our last Economic Outlook suggested we were cautiously observing signs of a firming recovery in the global economy. As growth started to improve though, we saw a wave of economic policy uncertainty after the US elections and ahead of elections in a number of European countries. Such uncertainty, if prolonged, would make firms and households more careful in spending, weakening the global recovery.

Six months on, it is clear that the signs of firming were not false flags. Firstly, economic growth has kept solidifying across the regions, forcing a series of upward forecast revisions (including those of ourselves), especially for the eurozone. Secondly, and most notably, economic policy uncertainty has fallen off a cliff in 2017. Despite stepped-up US self-assertion in trade matters, fears for large-scale US protectionism have faded. In Europe, voters have kept populist parties out of the mainstream, triggering at least a whiff of optimism regarding further European integration. We are definitely in calmer waters, finally.

Such an upbeat introduction could strike the regular Outlook reader as somewhat surprising. But complacency is precisely what we do not need at this stage. The reasons are not so much the consumption-driven character of the acceleration or the still-muted level of growth. Rather, what deserves full attention now is awareness that in calmer waters we will certainly not remain. The current upswing, being largely cyclical, will undoubtedly be succeeded by a downturn.

It is therefore crucial that when the next downturn sets in, economic policy tools – especially those of monetary policy – need to be available to keep the global economy above water. One can question: will they be? For the moment, we think that the answer is in the affirmative. Monetary tightening that has currently set in by the Federal Reserve, and to be followed suit by the European Central Bank, will provide for that: interest rates are being hiked and money taken out of the market. Still, as it stands now this looks like a very, very gradual process. At some point in time acceleration will become inevitable. That will be a balancing act. Tightening should create necessary utensils to address the next downturn. At the same time, accelerating the next downturn by that very tightening should be avoided.

The waters we are in are calm, and we should enjoy them. But they are also uncharted. This is no time for complacency.

John Lorié, Chief Economist Atradius

 

Executive Summary

Global economic momentum, which began picking up in H2 of 2016, has solidified through the year. While six months ago we were cautiously optimistic, this edition of the Economic Outlook paints a positive picture of the world economy over the forecast period. However, now is not a time for complacency. Particularly the normalisation of US monetary policy, badly needed to address a future downturn, is a balancing act.

Key points

• Global GDP growth is forecast to expand 2.9%, a marked acceleration from the lacklustre 2.4% growth last year. The 2018 outlook is stable, with 3.1% growth expected.
• Eurozone growth has been stronger than expected thus far in 2017 and is expected to lead other advanced markets with 2.3% growth forecast. The US is forecast to see a 2.2% expansion while the UK economy is expected to slow to 1.5% this year and next.
• Emerging markets are also enjoying strong growth, largely driven by high external demand, better policymaking, and recovering commodity prices. Latin America is forecast to expand 1.1% and further to 2.5% in 2018. Eastern Europe is surprising to the upside with growth expected to pick up to 3.1% this year before moderating to 2.3% in 2018. Emerging Asia continues to lead growth with a steady 6% forecast this year and 5.9% next year.
• The cyclical upturn in the global economy is driving a more positive insolvency outlook in both advanced and emerging markets.

The cyclical upturn in the global economy has continued to take root, accelerating world GDP growth to 2.9% after the slowest expansion since the global financial crisis. Momentum has been broad-based and spans both developed and emerging economies and is expected to carry through 2018. This increasingly robust outlook is outlined in Chapter 1. We also highlight again the uncharted territory that we find ourselves in, in advanced economies, where inflation is staying stubbornly low but central banks look to move forward with monetary tightening. While the outlook for 2017-2018 is strong, it is now that monetary policy tools must be sharpened to counter the next economic downturn.

There remain a number of risks that could push the global economy out of the calm waters it is now in. The key risks to our global outlook are: (1) misguided Fed policy, (2) a hard landing in China, (3) US protectionism, (4) oil price volatility, (5) geopolitical risk, and (6) financial market correction.

Chapter 2 presents the outlook for developed markets. The eurozone has been the star performer thus far in 2017, with loose monetary policy and tightening labour markets finally pushing consumption growth higher. While political uncertainty was the primary concern to the outlook in May, developments have largely rejected populism and strengthened the positive view. Policy uncertainty remains a concern in the US, but our baseline scenario is policy continuity. Economic growth is accelerating there, supported by consumption, higher investment, and possibly some fiscal stimulus. The UK economy is resilient but slowing slightly due to lower consumption and investment. Advanced Asia is benefitting strongly from the global upturn in international trade.

Stronger global trade flows are also a driver of the positive outlook for emerging markets, presented in Chapter 3. The modest recovery in commodity prices further aids commodity-exporting markets. The stronger economic outlook offers confidence for most regions that well-communicated, gradual Fed tightening should not be de-stabilising. Moderately slower economic growth in China is expected to strain growth slightly in many emerging markets in 2018 though.

Our global insolvency outlook is updated in Chapter 4. On top of a new forecast model, we expand our forecasting into advanced Asia and some key emerging markets, depending upon data availability. Besides a few exceptions, the insolvency outlook is moderately positive for 2017 and 2018, supported by the cyclical upturn in the worldwide economy.