Growth Outlook for 2016-2018 Not Impressive, Lacks Clear Cyclical Patterns, Says SEB

Despite significant domestic policy uncertainty, important emerging market (EM) economies such as Russia and Brazil are now past their worst downturns, partly due to more stable energy and commodity prices, according to Skandinaviska Enskilda Banken AB (SEB).

India is continuing its rapid growth, while China's economy is expected to decelerate in a controlled way.

"Overall, the growth outlook for 2016-2018 is not impressive and lacks clear cyclical patterns - with risks of worse growth outcomes continuing to outweigh upside risks," says the SEB.

GDP growth for the mainly affluent 35 member countries of the Organisation for Economic Cooperation and Development (OECD) will be 1.7 per cent this year, down from 2.3 per cent in 2015. In 2017 and 2018, annual growth in the OECD will be 2.0 per cent.

Monetary policy at end of road 

On the whole, monetary policy will be more expansioary over the coming year as several central banks, such as the European Central Bank (ECB), the Bank of Japan (BoJ) and Sweden's Riksbank, extend their bond purchasing (quantitative easing, QE) programmes, says the SEB.

The British, Japanese, Chinese and Norwegian central banks will cut their key interest rates further. The United States Federal Reserve (Fed) will move in the opposite direction, hiking its key rate this coming December, twice in 2017 and twice in 2018 to 1.75 per cent.

The low inflation environment will be tested as output gaps in various countries now close and policymakers increasingly intervene in wage formation, while commodity prices stabilise at somewhat higher levels. SEB expects Brent crude oil prices to be at US$55 to $60 per barrel until the end of 2018, with a downside risk.

A high propensity to save and low investment appetite are continuing to push down real global short-term interest rates, forcing central banks to adjust their estimates of a neutral key interest rate downward. This implies that today's monetary policies are not quite as expansionary as previously assumed, which in turn will slow future key rate hikes.

In addition, weaknesses in the banking systems in the euro zone, Japan and elsewhere impose restrictions on monetary policy. Yet the build-up of public sector debt in recent years limits the manoevring room of governments.

Various blockages increase the need for fresh thinking about the interactions between fiscal and monetary policy. Automatic discretionary fiscal stimulus packages may be a possibility, which in exceptional cases can be funded via "helicopter money.”

Brexit at least 80 per cent political 

The SEB maintains its conclusion that the economic effects of the Brexit process are manageable, but the political risks are serious - for both the UK and the EU.

SEB’s main scenario, which has a 70 per cent probability, implies that the "exit clause" in the EU's Lisbon Treaty will be activated early in 2017. Negotiations with the EU and non-EU countries will then occur in a constructive way, but it is highly doubtful that the UK can leave the EU after only two years and before the next election to the European Parliament in May 2019.

Euro zone economic growth diverges from country to country but is decent overall, despite weaknesses in banking systems and lingering questions about how banks that need fresh capital should receive  support, according to the SEB. GDP growth in the euro zone will be 1.6 per cent in 2016, then 1.7 per cent yearly in 2017 and 2018.

SEB’s conclusion is that the EU establishment will choose not to move in a more federalist direction. In practice, this means that the euro project will remain without an infrastructure and economic policy integration that can give the euro long-term stability, but heightened political uncertainty is not expected to worse the euro zone growth outlook perceptibly.

Although Chinese housing market indicators have rebounded, there is lingering uncertainty about debt and overcapacity in the economy. Beijing's 2016-2020 GDP growth target of 6.5-7.0 per cent yearly is not credible without further stimulus measures.

SEB anticipates a shift in the balance between monetary and fiscal policy; a necessary slowdown in credit growth will put heavier demands on fiscal policymakers. China's economy will show a controlled deceleration, growing by 6.6 per cent this year. GDP growth will slow to 6.3 per cent in 2017 and 6.0 per cent in 2018.

Rising political temperature in the US

The US economy lost momentum during the first half, affecting our full-year 2016 GDP forecast. Recent indicators - combined with underlying strong consumption growth and clearly expansionary financial conditions - are supporting the real economy.

SEB’s GDP growth forecast for 2016 is 1.6 per cent (previously 1.9 per cent). Next year, growth will accelerate to 2.4 per cent (2.5). Certain supply-side restrictions will push growth down to 2.0 per cent in 2018, in line with potential growth.

Unemployment will continue to fall, reaching 4.2 per cent by the end of 2018 compared to 4.9 per cent today. The pace of wage and salary increases will move cautiously higher, providing the Fed with reasons for gradually hiking its key rate.

“We estimate that the probability of a Hillary Clinton victory in the November presidential election is 85 per cent. Such an outcome would not change the US economic outlook to any great extent, despite some protectionist elements in Clinton's campaign statements.

“If Donald Trump wins, this will boost foreign and security policy uncertainty, but the Congressional mill will largely grind down any odd economic policy proposals,” said the SEB.




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