Global Economy Forecast to Expand at Rate of 2.8 Percent in 2017

The global economy is expected to expand at a rate of 2.8 percent in 2017, better than the 2016 rate, but marking a sixth consecutive year below 3 percent, according to a forecast from Nariman Behravesh, chief economist at IHS Markit.

“The expectation that the incoming U.S. administration will enact sizeable fiscal stimulus has increased optimism about U.S. and global growth,” Behravesh said.

“On the other hand, higher American bond yields have a negative impact on the emerging world, significantly reducing the scope for further monetary easing. Fortunately, these financial market gyrations are occurring at a time when commodity prices are rising and both consumer and business sentiment have improved.”

IHS Markit believes that the balance of these trends will be moderately positive for global growth, which is expected to increase from 2.5 percent in 2016 to 2.8 percent in 2017 and 3.1 percent in 2018.

U.S. economy to expand

The U.S. economy is forecast to expand on positive business and consumer confidence, and implementation of tax cuts and infrastructure spending enacted early in 2017.

On the downside, the rise in interest rates and the dollar will erode some of the positive effects of stimulus. IHS Markit predicts that U.S. growth will increase to 2.3 percent in 2017 and 2.6 percent in 2018.

Europe faces daunting political challenges which could hurt confidence and growth next year, including a potentially contentious Brexit, fallout from the recent referendum defeat in Italy, and upcoming elections in France, Germany and the Netherlands.

IHS Markit continues to believe that these conflicting forces will weaken Eurozone growth from 1.7 percent in 2016 to 1.4 percent in 2017, with U.K. growth to fall from 2.1 percent in 2016 to 1.3 percent in 2017.

Japan’s economy will gain a little traction

Behravesh also predicts that Japan’s economy will gain a little traction, steadying at 1.0 percent in 2016 and 2017, thanks to a weaker yen.

China’s growth will grind down further, led by a housing construction slowdown and removal of government stimulus. The renminbi is back to 2008 levels, with the government imposing capital controls in an attempt to relieve pressure on the currency and limit annual depreciation.

IHS Markit believes China’s policy contradictions will result in growth slowing from 6.7 percent in 2016 to 6.4 percent in 2017.

Emerging markets will do better despite recent financial market pressures. Economic fundamentals in most emerging markets have improved in the past couple of years and, with the exception of China, overall debt ratios are mostly down. This means that these economies will be able to enjoy the fruits of a more upbeat global outlook.

Inflation rates will rise

Inflation rates will move up in many parts of the world, while  U.S. interest rates will keep rising. IHS Markit predicts the Fed will raise interest rates at least three times in 2017 and keep raising rates until the overnight federal funds rate reaches 3.0 percent by the end of 2019.

The U.S. dollar will appreciate more, though the rise will not be uniform. The biggest rise is likely to be against the euro and the yen, as monetary policy in the Eurozone and Japan will be more accommodative than in the United States.

By the fourth quarter of 2017, the euro will briefly touch parity and the yen will fall to around 120. On the other hand, emerging market currencies will fall much less because they have already seen large declines.

Risks of a U.S. or global recession will remain low at no more than 25 percent.

 

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