Global Growth Defy Political Uncertainty, Says SEB

Well-founded optimism - not mere hopes - will characterize the world economy in 2017-18. Although conflict levels have escalated and political challenges should not be minimized, protectionist rhetoric is not identical with practical policy, according to SEB economists.

Underlying strength among emerging market (EM) economies, including China, and a rebounding investment cycle are offsetting political risks around the world.

SEB’s positive economic scenario will continue to materialize. GDP growth in the 35 mostly affluent countries of the Organisation for Economic Cooperation and Development (OECD) will average 2.1 per cent this year, somewhat higher than in 2016, and 2.2 per cent in 2018.

In practice, sentiment indicators are even hinting at somewhat higher growth than SEB forecasts reflect today, but major social challenges remain, such as economic inequality, aging populations and sectoral job losses due to digitization and automation.

Trump more pragmatic and less dogmatic

Global economic policy uncertainty is at historically high levels and is colored by populism and protectionism, which go hand in hand. As expected, US President Donald Trump's economic policies ("Trumponomics") have proved difficult to implement and the president has repeatedly changed his mind.

Yet relations between the world's two economic superpowers, China and the United States, have improved. World trade is showing an upward trend in spite of everything and seems to be generally robust.

Because of a strong labour market and increased capital spending, after a temporary dip early in 2017 the US will have GDP growth of 2.3 per cent this year, up from 1.6 per cent in 2016, and then reach 2.5 per cent in 2018.

SEB’s conclusion that Trumponomics will be incapable of delivering so much stimulus has been confirmed, which will limit growth in 2017-2018. The US labour market will nonetheless become increasingly tight; unemployment will fall nearly to 4 per cent and pay increases will reach 3.5 per cent yearly.

Chinese economy in high gear, but Beijing will tighten credit conditions

Adjustment processes in EM economies are making them more resilient to American key interest rate hikes, but high debts and political risks pose threats, say SEB economists.

China's GDP will grow by 6.7 per cent this year and 6.3 per cent in 2018, with clear improvement in the manufacturing and construction sectors, but the authorities will tighten credit conditions.

Looking ahead, this will dampen growth but meanwhile decrease the risk of financial imbalances. The other BRIC economies, especially India, will confirm the important contributions of emerging economies to the improved global outlook in 2017-18. 

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