We're halfway through 2016, and it's a good time to take stock of where things stand in the world's major economies. Moreover, with the first six months of the year now behind us, we have a better idea of where things might be headed in 2017. With that in mind, the following overview of economic trends will give you a sense of what to expect for the rest of this year and into the next.
It looks like 2016 will be another subpar year in terms of global economic growth. Since 2012, world real gross domestic product (GDP) growth has been stuck in the 2.5%-2.7% range. That's unlikely to change this year, but we expect to see some improvement next year. A significant amount of that rebound is likely to emanate from the industrial production sector. Global industrial production has slowed from a 2.7% growth rate in 2014 to a 1.2% reading in 2015 and is likely to grow only 1.2% in 2016. However, we expect it to bounce back at around 3.1% in 2017, and to be a tad over 3.0% for each year in the period 2017-2020. (See Figure 1.)
Global economic growth faces challenges due to a perfect storm of political risks. Uncertainty over the United Kingdom's referendum on European Union membership has hurt business growth and sentiment, mitigating consumer confidence and spending growth in that country. The suspension of Brazil's president, Dilma Rousseff, has exacerbated that country's economic woes, and a resurgence of populism in Austria and the Philippines has also raised concerns. In addition, the political climate in the United States could further deter already weakened U.S. business investment and corporate hiring.
The divergence in real GDP growth rates among the world's key economies is widening. Several, such as Brazil, Russia, and Venezuela, are in deep recessions. Others, including Argentina, Japan, and South Africa, are on the cusp of entering recession territory. A couple of the eurozone countries are growing at subpar rates and are vulnerable to economic or financial setbacks. Growth is relatively more solid but somewhat unexciting in Canada, Germany, Sweden, the United Kingdom, and the United States. However, a few economies, such as India, Indonesia, the Philippines, and Vietnam, are performing rather well. As for China, its structural problems and ongoing transition to light manufacturing and a service-oriented economy make it difficult to classify its current economic and financial performance.
Approximately 25 percent of the world's GDP is under a negative interest rate regime. Negative interest rates have been applied by the Bank of Japan, European Central Bank (the central bank of the eurozone countries), Danish National Bank, Swedish National Bank, and Swiss National Bank. Negative interest rates are rather experimental and are a clear indication that traditional monetary-policy options have not been successful. These central banks are trying this approach in order to promote growth. Negative interest rates influence growth by punishing banks that have high levels of cash holdings instead of providing loans. Since central banks provide a benchmark for most borrowing costs, negative rates can also have a profound impact on fixed-income securities; by the end of April 2016 approximately US$8 trillion of government bonds globally offered negative yields. The U.S. Federal Reserve did raise rates in December 2015 but is unlikely to do so again until late this year. Meanwhile, the Bank of England is unlikely to raise rates until next year and is eagerly awaiting the results of the United Kingdom's vote on European Union membership in late June.
European growth is slow, steady, and bifurcated, with no shortage of political risks. Although the foundations of Europe's economic growth remain fairly firm due to low commodity and low energy prices, competitive currencies, and monetary stimulus, the region faces multiple political risks. These include the ongoing refugee crisis, terrorist attacks, the U.K.'s referendum on EU membership, and the on-again, off-again flare-ups over Greek debt. The growth prospects seem to be rather bifurcated, with countries in Europe's northern zone growing at a steady pace, and those in the southern zone coming out of a deep ditch, showing some promise (Spain), or exposed to financial and economic shocks.
Japan's jagged real-GDP growth pattern is likely to persist well into next year. Japanese exposure to China's transitioning economy is rather elevated in comparison to that of the United States, and even small shocks can push economic growth into negative territory. There are several structural issues hindering Japan's long-term growth, such as a shrinking population and an aging workforce.
China's economic growth will slow further in 2016. The economy's digestion of industrial-sector excess capacity, a glut of housing inventory, and a debt bubble will place additional pressure on China's domestic demand. Moreover, weak and unstable global demand means the country won't be able to export its way to recovery as it did in the past.
As China's economy continues to weaken and its export sector continues to struggle, global financial markets have become increasingly jittery about China's currency. Owing to a strong U.S. dollar, China's stable exchange rate vis-Ã -vis the dollar is hurting the competitiveness of Chinese exports. With the general economy slowing, the renminbi is thus increasingly under pressure to depreciate. However, devaluing the renminbi significantly could cause financial-market panic, trigger massive capital flight, and crunch domestic liquidity. Given Chinese policymakers' risk aversion and preference for stability, the most probable policy choice will be to implement moderate, but less predictable, devaluation and stricter capital controls, while helping exporters regain some cost competitiveness through tax policy.
Other emerging markets are likely to improve as commodity prices gradually increase and financial pressures ease. As fears about China's currency have lessened (at least temporarily), and as oil and commodity prices have risen in the past few months, the intense downward pressures on many emerging markets' currencies and equity markets have lessened. Some countries are in a better position to gain from these trends than others. In particular, the economic fundamentals for India and Indonesia remain strong with respect to trade and debt levels. While Russia will benefit from higher oil revenue and currency stabilization, Western financial sanctions are likely to continue to impede capital inflows. Countries with large current-account deficits, high amounts of debt, or both—such as South Africa, Turkey, Malaysia, and Colombia—remain vulnerable to financial instability.
The United States is one of the bright spots among the post-industrial economies. However, it is currently a two-tiered economy in terms of growth: service sectors are doing well, but manufacturing is struggling. Business investment in energy and exports are hurting due to a stronger dollar, relatively low oil prices, and weak global growth. The consumer sector and housing market are doing most of the heavy lifting.
The U.S. consumer continues to play a significant role in the global economy. U.S. consumption as a percentage of global GDP peaked at approximately 21.4% in 2002, and then declined to 14.7% in 2011. However, in 2015, U.S. consumption as a percentage of world GDP jumped to 16.7% and is likely to reach 17.4% for all of 2016. Consumer spending in Western Europe reached almost 18% of world GDP in 2004 and has since fallen to approximately 12.0% for 2016. BRIC (Brazil, Russia, India, and China) consumer spending was a major source of global growth from 2000 through 2014 but then dropped to the 9-10% range. It is likely to remain there for the next several years. (See Figure 2.)
Although it's hard to summarize such a complex situation in just a few words, the general takeaway is this: Rising political risks and slow growth are hampering economies in 2016, but the prospects for 2017 are significantly brighter.
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