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Global economic outlook appears brighter as risks recede
After years of economic crises and recessions, the global economy in 2017 seems finally to be firing on all cylinders. It took a long time to get to this point, but this year—for the first time since 2007—all 35 countries in the Organization for Economic Co-operation and Development (OECD) are growing. What's more, nearly three-quarters of them are seeing their growth accelerate.
The BRICs (Brazil, Russia, India, and China) are looking sturdier than in the past: Brazil exited a two-year recession in the first quarter, and Russia, which had seen its gross domestic product (GDP) decline in year-on-year terms for seven consecutive quarters, pushed GDP up past its year-ago level in the fourth quarter of 2016. (See Figure 1.) Meanwhile, China, which has been on a decelerating path, is seeing a modest growth spurt in 2017, with growth likely to outpace that of the previous year for the first time in seven years. The long-troubled European Union is on solid economic footing, with an unemployment rate in June at the lowest level since February 2009. With all of these positive forces in play, the global economic growth rate this year is likely to be the fastest it has been since 2011.
[Figure 1] Annual real GDP growth Enlarge this image
Policy risks recede
Economic stability is never the only story, however, and for parts of 2016, it was looking like political developments were poised to spill over into the economic punch bowl. In June of 2016, voters in the United Kingdom shocked the world when a majority unexpectedly voted in favor of leaving the European Union (a decision popularly known as Brexit). This was followed by the U.S. election of Donald Trump in November 2016. Both moments represented the victory of protectionist, anti-immigration, anti-globalist movements, leading some to wonder whether more countries would soon follow—and whether the EU's very existence was under threat. Such outcomes normally dampen growth; notwithstanding their effect on the economies of particular countries, protectionist trade regimes and other trade barriers are commonly understood to inhibit global economic activity.
But in the wave of elections that followed, nationalism seemed to lose momentum. That December, in Austria, Alexander Van der Bellen, a pro-European liberal, was elected president in a convincing victory over the right-wing candidate Norbert Hofer. In March 2017, the Dutch parliamentary election, viewed as a referendum on the far-right populism championed by firebrand Geert Wilders, resulted in the continued majority of center-right Prime Minister Mark Rutte's party. In May, French centrist Emmanuel Macron, at the head of a party (En Marche) founded only one year before, defeated right-wing nationalist Marine Le Pen in a presidential run-off election, and En Marche followed this up in June parliamentary elections by securing a substantial majority of seats. A June snap election called by U.K. Prime Minister Theresa May, far from strengthening her Conservative Party's position, resulted in the loss of its majority, an outcome that could lead to a "softer" Brexit. In the same election, the U.K. Independence Party—whose major issue was championing the U.K.'s withdrawal from the EU—won zero seats. And in September, Angela Merkel won four more years as Germany's chancellor, although the insurgent right-wing AfD party showed new strength. Financial markets generally responded better to victories of pro-trade candidates; for example, when Macron was elected, the euro strengthened, while news of Brexit hit the value of the pound sterling hard.
Of course, the story of political risks to economic growth will never truly end. In Spain, a referendum on Catalonian independence was held in September, but its legitimacy was disputed by the Spanish government and international observers. The result was overwhelmingly pro-independence but was complicated by the nonparticipation of many voters who opposed independence. The ongoing disputes related to Catalonian independence—and the possibility that it would actually occur—are a significant risk to Spain's economic recovery. Looking forward, Italy's next general parliamentary election is slated to happen by May 2018. The degree of success of the anti-establishment, euroskeptic "five-star" movement will be seen as a measure of the public's appetite for a referendum on EU membership, a vote the movement has pledged to hold. And even as Brazil emerges from economic recession, it has landed back in political instability thanks to a corruption scandal. The saga, which has been ongoing for years, played a role in the country's recession and resulted in the impeachment and ouster of former President Dilma Rousseff. Her successor, Michel Temer, has been implicated in criminal charges. As the drama continues to play out, Brazil's recovery remains on shaky ground.
Engines of global growth
A look at the other BRICS, India and China, shows that China's GDP per capita of US$8,137 in 2015 stands in stark contrast to India's tally of US$1,629, despite the two countries' similar populations. (India is projected to surpass China in population in 2022.)
India and China have the two largest populations in the world. That, combined with brisk growth rates averaging 7.2 percent and 9.0 percent, respectively, over the last 10 years, has made them collectively responsible for more than 40 percent of the world's GDP growth over the past decade. Although each faces its own manner of challenges, their economic development has been key in reducing the global poverty rate (proportion of people who live on US$1.90 or less per day) from 35 percent in 1990 to below 11 percent today.
But in China, economic fundamentals are weak, and the country's economic structure includes major imbalances. In particular, consumer demand is suppressed thanks to a high propensity to save; China's financial system is relatively undeveloped and does not make it easy for private enterprises to borrow, resulting in a volatile "shadow" lending system; and Chinese policymakers are still trying to gradually unwind a real estate bubble without causing a "hard landing." China's growth has slowed for each of the last six years, in spite of repeated stimulus measures by the government, and we expect this trend to generally continue for the foreseeable future. But slowing growth in China's case is a symptom of "convergence," an economic concept that refers to countries that are behind in development growing at a faster pace than developed economies. Thanks to its earlier rapid growth, China is beginning the natural process of settling into the more sedate growth pace of a developed economy.
India, meanwhile, suffers from major underdevelopment of infrastructure. Reform efforts have produced disruption; in particular, the November 2016 demonetization, in which Prime Minister Narendra Modi's government suddenly recalled two major denominations of the rupee in a bid to impede tax evasion and counterfeiting, shocked consumer spending amid cash shortages. But this year has seen some promising signs on the reform front. Following more than a decade of negotiation, a unified goods and services tax came into effect in July 2017, replacing a slate of other taxes. The new rule eliminates instances of double taxation and slashes logistical and bureaucratic costs of compliance. If successful, the tax has the potential to improve India's competitiveness and accelerate development. And even though the demonetization measure produced disruption and lowered consumer spending in the short term, a subsequent landslide victory in 2017 for the ruling Bharatiya Janata Party (BJP) in Uttar Pradesh—India's biggest state—puts fresh wind in the sails of BJP's reform agenda.
While risks to the global economic growth outlook still exist, threats that seemed major just one year ago—including trade wars, instability in the EU, and a sharp Chinese economic contraction—now rate as outside possibilities. Barring war or panic, the stage is set for a good few years of broad-based international economic growth.
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