Briefing | Strong global growth projections for 2017
What are the global growth projections?
Higher consumer and business confidence is expected to increase economic activity and consequently increase economic growth this year. The World Economic Outlook (WEO) 2017 has forecasted that the global economy will grow by 3.6 per cent in 2017 and 3.7 per cent in 2017 after just materialising growth of 3.2 per cent in 2016. These projections for 2017 and 2018 are 0.1 per cent higher than the original projections made in April 2017 after observed improvements in global economic activity. Due to the increase in global growth momentum in the first quarter, growth projections for advanced economies have improved from 2.0 to 2.2 per cent. Growth forecast for China has improved from 6.6 per cent to 6.8 per cent, while growth in emerging market economies are also expected to improve by 0.1 per cent for both 2017 and 2018 arising from stronger growth projection in China.
What factors have contributed to the improvement?
The improvement in projections comes as actual growth was better than projected in the first half of this year for countries in the Euro area, other emerging European economies, Japan, emerging Asian countries and Russia. Demand, as well as output, grew faster in first quarter of 2017 relative to the last quarter of 2016 in advanced economies. The increase in growth in the aforementioned economies, according to the WEO, is expected to offset the downward revisions in growth projected in other countries including the UK. Growth in the US is expected to improve from greater business investment and consumption as the energy sector improves. Improvements in the equity markets in both developed countries and emerging markets has provided generally good outlook for the financial sector. The improvement in growth prospects comes as result of increased private consumption, investment and external demand in the Euro area and Japan. Although the overall growth projections continue to improve, growth continues to lag behind for many countries. Growth in GDP per capita in particular has been restrained by slow improvements in productivity and increasing old-age-dependency ratios according to the WEO.
What are the risks to growth?
Many countries need to guard against financial stability risks as nationalistic and anti-globalisation policies in some advance economies along with increased uncertainty in the direction of policy and increased geopolitical tension could adversely affect the global growth prospects. According to the WEO there are several factors that might pose risks and limit the world's output potential. These include rapid and sizable tightening of global policy conditions in the United States and the Euro area, for example. there could be higher long-term interest rates in the United States, although thus far this year, interest rates in the US has fallen by more than 25 basis points, there is an anticipated increase due to the country's global policy stance which might have spill over effects on smaller and emerging market economies. This tightening could arise from a reduction investors risk appetite. Other risks could arise if inflation remains low in advance economies, the central banks cannot use monetary policy as a tool to stimulate investment. Also if the improvement in the financial sectors made since the global financial crisis are undermined it could reduce capital buffers and supervisory competence.
What should be the key areas of focus?
Notwithstanding the risks, the WEO has outlined key areas that countries should strategise and focus on. Structural reforms and expansionary policy are essential to increase productivity and supply. Countries should focus on increasing the capacity of labour to meet the demands of improve technological processes. Countries should try as well to resist the urge to internalise policies. Countries should continue to strengthen international cooperation and avoid protectionist polices. Expansionary polices are also necessary to secure the recovery that the global economy has been experiencing thus far as well as to build resilience for the future. Monetary policy in particular should be employed to usher inflation towards targets.
What is the projection for inflation?
Global inflation is expected to remain low at about 4.5 per cent for 2017. Oil prices have declined by 8.1 per cent between February and August of 2017 resulting in declined in the International Monetary Fund's primary commodity price index by five per cent over the same period. The average natural gas price index for Europe, Japan and the US has fallen by 9.6 per cent. The average coal price index for Australia and South Africa prices has increased by 16.5 per cent. The price of metal as a non-fuel commodity increased by 0.8 per cent, while agricultural prices fell by five per cent over the same period.
- Dr Andre Haughton is a lecturer in the Department of Economics on the Mona Campus of the University of the West Indies. Follow him on Twitter @DrAndreHaughton; or email firstname.lastname@example.org.