The political earthquakes of 2016 have upended conventional thinking about the global economy and have ironically brightened the outlook, according to new analysis released at the World Economic Forum in Davos by IHS Markit.
Global growth is expected to increase from 2.5 percent in 2016 to 2.8 percent in 2017 and 3.1 percent in 2018.
“In 2017, the global economy will see a rebound in growth for first time since 2014,” said Nariman Behravesh, chief economist, IHS Markit. “The expectation that the incoming Trump administration will enact sizeable fiscal stimulus has increased optimism about the U.S. and the global economies. U.S. stock indexes are at record highs and interest rates and the dollar are rising. Data such as IHS Markit’s PMI surveys are already pointing to 2017 starting on a solid footing, with growth at the end of 2016 having gained momentum.”
Emerging markets may finally get a break
“Emerging markets have really struggled in the past few years,” Behravesh said. “But, a growing global economy will mean that emerging markets can finally take a breath.”
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. Commodity prices are rising and both consumer and business sentiment have improved. This means that these economies will be able to enjoy the fruits of a more upbeat global outlook.
Protectionist populism could rain on the parade
“Unfortunately, political and policy uncertainties as well as risks are higher now than they were a year ago,” Behravesh said at the World Economic Forum. “The rise of anti-globalization movements in the U.S. and Europe could result in policies that hurt growth. In particular, a trade war could push the U.S. and global economies into recession.”
However, business-friendly policies (including lower corporate taxes and a roll-back of regulation) could boost both short-term and long-term growth, the IHS Markit analysis said. “Based on recent statements by President-elect Trump, his advisors and Congressional leaders, IHS Markit believes that the latter scenario is more likely than the former,” Behravesh said.
The mood in Davos
“Compared with 2016, the mood in Davos this year can best be characterized as a mixture of anticipation and anxiety,” Behravesh said.
“On the one hand, the global economic outlook is a little brighter. On the other hand, the rise of anti-establishment, populist sentiment in both the United States and Europe is a huge challenge for global leaders. Whether “pro-growth populism” or “protectionist populism” becomes the dominant theme of the next few years will depend crucially on responsive and responsible leadership.”
“There is a lot of optimism at Davos this year about the role of new technologies across industries,” said Lance Uggla, president of IHS Markit.
“Applying new kinds of data in smarter ways can lead to more intelligent investment and risk management. Advanced analytics help companies better understand the market, driving innovation and disruption. Across industries, I sense real excitement about the new environment that we are seeing in the Fourth Industrial Revolution.”