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ECONOMIC OVERVIEW March 2017
Global Macroeconomic View

Sentiment about prospects for the world economy improved significantly in the late stages of 2016. Global growth remains below its long-run average pace, with recent monthly manufacturing survey (PMI) data suggesting that improved conditions in China’s economy has helped foster a sequential pickup in growth at the global level. The world’s major advanced economies remain on the recovery path which has been paved by accommodative monetary policy settings. Overall, the current picture suggests the world economy is set to begin 2017 on a relatively firm footing. The IMF has forecast that global output will expand 3.4% in 2017, unchanged from its prior forecast published in July. If the IMF forecast is realised, global growth is set to accelerate by 0.3% from an estimated pace of 3.1% in 2016.

 

 

Short Term

AME expects that the global economy expanded 3.1% in 2016. High-frequency activity indicators have pointed to an encouraging, albeit modest, upswing in global industrial production in recent months. This apparent increase in momentum comes after a sluggish first six months of the year, when growth in the world economy slowed slightly relative to the second half of 2015. Evidence of an acceleration in global industrial production suggests the near-term outlook for international trade has also brightened, notwithstanding an increasing level of anti-globalisation rhetoric around the world which has largely remained contained to the political arena.

  • The United States economy is arguably leading the recovery among its advanced economy peers in the wake of the financial crises and economic downturns which have stunted growth over the past decade. The US economy was a central topic during the recent US Presidential race which culminated in the emergence of Donald Trump as President. The election campaign provided a reminder that pockets of the US economy remain subdued, however conditions in the labour market continue to improve on an aggregate basis. While the US election result has provided markets with an element of clarity, it has generated uncertainty about the likely impact of the political transition on the world economy.
  • A strengthening US dollar has been a defining feature of the post-election environment. Once the election result was known, financial markets increasingly raised their collective expectation that the FOMC would raise the US Federal Funds rate at the scheduled December 2016 policy meeting. The Federal Reserve duly delivered, raising the Federal Funds rate by 25 basis points on December 14th. Moreover, the FOMC lifted its forward guidance for US interest rates. The so-called ‘dot plots’ indicate three further rate hikes are anticipated for 2017; previous guidance was two instances. The shift in the FOMC’s stance in part reflects an increased perception that the US economy will receive an injection of stimulus in the form of government investment approved by President Trump. This has spurred an increase in inflation expectations based on the view that spare capacity in the US economy will be further diminished.
  • In China, real estate prices appeared to be cooling in the latter stages of 2016, according to National Bureau of Statistics (NBS) data released in December. Measures of Chinese property prices have pointed to steep gains through most of 2016. Recent data showing price momentum has slowed suggest real estate sector sentiment may also be weakening. Price increases for new homes softened to 0.6% month on month in November, down from 1.1% in October. The deceleration was broad-based across tier-1 and tier 2 cities represented in the NBS sample of 70 major cities. In China's tier-1 (most developed) cities, new home prices increased 0.1% month on month in November, compared with a 0.5% gain in October. In tier-2 cities, price growth slowed to 0.4% month on month in November compared with 1.3% in October. AME expects cooling prices will negatively impact developer sentiment which may foreshadow a slowdown in China's construction activity in 2017.
  • In the United Kingdom, the referendum decision to exit the European Union has weighed heavily on sentiment regarding the UK economy, however measures of activity suggest relatively little immediate impact on output. At its latest policy meeting held on December 15th, the Bank of England (BoE) decided to leave UK monetary settings unchanged. The UK central bank voted unanimously to keep the policy interest rate at 0.25% and to continue quantitative easing at its existing rate. On the outlook, the BoE said the UK economy is expected to grow at a "moderate pace" in the near term, but anticipated some slowing in household income growth may drag on growth in 2017. The BoE acknowledged an ongoing risk to economic activity and sentiment posed by Brexit. UK consumer price inflation was forecast to increase to the bank's 2% year-on-year target within six months, up from November’s 1.2% actual pace. Looking ahead, AME expects ongoing uncertainty about its prospects post-Brexit will remain a growth headwind for the UK economy.

  • The Eurozone has recorded its highest PMI value in almost six years in February on strong performances from both France and Germany. The area’s composite purchasing managers index accelerated to 56.0 for the month, up from 54.4 in January. This strong performance indicated that quarter-on-quarter GDP growth projections of 0.6% for the March Quarter of 2017 are very achievable. The manufacturing PMI for Germany reached 55.5, with the service sector rising to 55.6. AME expects this strength will continue to flow through the Eurozone economy in 2017, leading to stronger demand for most commodities. AME has already forecast strong steel production and consumption growth in Germany in 2017 on healthy heavy machine and automobile production growth. Sustained high PMI and GDP numbers in the March Quarter will place an upward risk on our current apparent and end-use consumption forecasts.

  • The Reserve Bank of India (RBI) kept its benchmark repo rate unchanged at 6.25% at its policy meeting on Wednesday. Markets were expecting a 25 basis point rate cut. In its accompanying statement, the RBI indicated its policy stance had shifted to 'neutral' from 'accommodative'. The central bank pointed to increases in global commodity prices as a source of upward pressure on inflation. On recent developments in India's industrial sector, the RBI noted increased momentum in "core industries" in December, pointing to acceleration in both sequential and year-ended terms. The central bank noted recent PMI readings had returned to expansionary territory driven by growth in new orders and output, while the sub-index of future output had risen strongly. After estimated 6.9% GVA growth in fiscal year 2016-17, the RBI expects India's economic growth will "recover strongly" in 2017-18.

Medium Term

Over the medium term (2018–2020) we expect the global economy will grow at an average rate of 3.7% per annum.

  • In a post-GFC context, we believe prospects for the world economy will progressively improve over the medium term. AME’s forecast for the period 2018-20 is comparable to the average annual rate of 3.8% over the last 15 years (2001–2015), but slightly higher than the 3.7% average pace of the past ten years (2006–2015) and 3.5% in the past five years (2011–2015).
  • Stronger growth over the medium term will be predominantly driven by a continued pick-up in emerging market economies, particularly those that have experienced especially severe downturns in recent years. We expect the Russian economy will see a return to growth in year-on-year terms in March Quarter of 2017, with Brazil to emerge from recession the following quarter. Across the developed world we expect spare capacity will continue to diminish.  While gradually tightening, monetary policy is also expected to remain at historically accommodative settings in many advanced economies over the medium term.

  • China is expected to continue to post solid growth rates of around 6% in the medium term. Nevertheless, there are risks to the underlying assumption that the country will manage a smooth transition to a new growth model.

Long Term

Over the long-term forecast horizon (2021-2030) we believe the world economy will grow at an average pace of 3.5% per year.

  • This compares to 3.7–3.8% average annual growth over both the medium term and over the past 15 years. 
  • Embodied in our forecasts is an assumption that spare capacity in the world’s advanced economies has diminished which spurs investment in additional capacity. We expect demographic factors will represent a headwind to aggregate growth, notably the drag of ageing populations in advanced economies which will reduce the supply of potential labour. Growth in emerging markets is expected to outpace growth in developed economies however emerging market growth rates are also expected to decline, driven by the maturing of the Chinese economy. We expect China gradual economic ‘rebalancing’ to continue with domestic consumption to contribute an increasingly large share of growth over the long term outlook period, consequently lessening the reliance of China’s economy on investment and exports as drivers of growth.

  • Slower growth rates in China will also limit growth potential in other emerging markets. However, India, which is less dependent on external trade, is forecast to continue to post growth rates way above the average, supported by favourable demographics.
  • The outlook for productivity growth in key economies is uncertain. Weak productivity growth was already an issue in a number of advanced economies before the global financial crisis, and has since persisted.