Lower for longer

The world economy will struggle to gain altitude, forecasts Leo Abruzzese


Sluggish growth is the new normal for the global economy. World output measured at market exchange rates will increase by less than 3% for the sixth straight year in 2017, further extending what was already the longest stretch of weak growth in more than half a century (see chart). The strong recovery that was expected after the global bust in 2008 never happened, and it won’t start in 2017. Donald Trump’s anti-trade policies, if they come to pass, will hurt the global economy over time, but won’t do much damage in 2017—unless he starts a tariff war with China, which is unlikely. Weak demand and poor productivity growth will be the greater problem in the coming year.

A strong global economy typically grows by around 4% a year, measured at market rates (which is the rate used by investors to move currency across borders and by businesses to repatriate profits). Growth of 3% is closer to normal, and is what the world averaged in the 20 years to 2005. The economy has regularly managed a short sprint. No longer. The Economist Intelligence Unit predicts that global GDP will expand by only 2.5% in 2017 and will do no better in the years immediately thereafter.

Weakness is everywhere. Growth in the euro zone hasn’t exceeded 2% for six consecutive years. America hasn’t strung together more than two continuous quarters of strong growth in more than a decade and won’t do any better in the first year of an unpredictable Trump presidency. Japan’s economy struggles to expand by even 1% a year. Most emerging markets came off the boil a decade ago. China, weighed down by debt, will push growth to 6% in 2017, but this will fall back to around 4% the year after—remarkably low by the country’s own standards. Among the world’s large economies, only India looks relatively buoyant; it will advance by 7.5%.

Slow growth will keep the world’s beleaguered central banks in the spotlight. America’s Federal Reserve, content that the jobs market is nearing normal, has been hinting at higher interest rates, though the immediate shock of a Trump presidency may stay its hand. At most, it will raise its main rate only once in 2017, by a quarter-point: the economy won’t tolerate anything more. The European Central Bank (ECB), the Bank of Japan (BOJ) and a post-Brexit Bank of England will be searching for more ways to prod their languishing economies. Years of near-zero interest rates—and now negative interest rates at the ECB and the BOJ—have produced diminishing returns, but central bankers dare not reverse course. A blast of fiscal stimulus would help: lower sales taxes and income taxes, better jobless benefits and a round of well-planned infrastructure projects might achieve what central bankers can’t. Canada is edging in this direction, and Britain may do the same. Fiscal pump-priming will be on the Trump agenda as well. But don’t expect anything like that from most countries.

Growth has been slow in part because of fading productivity. Output per worker in America expanded by 1.9% a year between 1990 and 2005, but by less than half that in the past decade. The euro zone was less productive than America to start with, and the rate there also fell by half. Productivity growth is usually higher in emerging markets, but the pace in China has slipped back, too. The outlook is no better for 2017. In the West, weak investment and overregulation seem to have taken a toll.

Look on the bright side

None of this equals an entirely gloomy year. American consumers will regain more of their swagger. The income stagnation that has contributed to weak spending may be reversing: the latest figures show median household income rising at the fastest rate since at least 1967. The nation’s jobs machine will add another 2m positions in 2017, as it has in each of the past six years: business uncertainty over some Trump policies could be offset by cheer at less regulation and lower taxes. China’s shift to a consumer-led economy will accelerate, despite its dizzy levels of debt: credit is growing three times faster than nominal GDP. Although Brexit presents Europe with the latest in a rolling series of crises, the economic damage will be small for most countries. (The British economy itself will struggle with rising prices and weaker growth as the slow-motion withdrawal from the EU begins.)

After two years of recession, Russia will squeeze out a bit of growth in 2017. Brazil’s recession will end too, but the public fin­ances are a mess and the country is years away from a strong ­recovery. For the large number of countries that rely on mining and farming, commodities prices will rise in 2017 for the first time in five years, creeping up by around 4% on average. But if the commodity bear market is over, a price surge isn’t in sight. Economic growth globally is too weak for that. In an earlier era, when bus­iness cycles still mattered, that might have meant stronger growth lay ahead. Maybe so, but not in 2017.

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