The $74 trillion dollar question
25 July 2017
This year has offered some surprises – the political gridlock in Washington has surpassed even the most pessimistic expectations, Chinese growth rebounded beyond most economists’ expectations and Theresa May’s gamble on a ‘snap’ election added an unexpected twist to Brexit negotiations. Despite this, global trade and production have continued to grow at a healthy pace. With the year more than half over, we try to examine the biggest remaining questions facing the global economy over the remainder of 2017. As we write the last Weekly Economic Briefing before our August break, we look at the key unknowns and assess potential outcomes.
The first global question is whether the current trade and production cycle has peaked. The global manufacturing cycle has been rebounding since the fourth quarter of 2016, led by emerging markets (EM) and Europe. However it has been uneven. Even within EM most of the improvement has been led by stronger trade activity in Asia and emerging Europe (see Chart 1), as these regions benefit from proximity to fast growing China and the EU, respectively. Global survey data such as the JP Morgan Global PMI show continued manufacturing expansion, but activity appears to have peaked in the first quarter. A key factor is whether activity broadens, both within countries such as the US where it is concentrated in the energy sector or China where it is concentrated in the housing sector, but also among countries. The second question is how policy changes will shape the growth outlook, specifically around trade, but also fiscal policy. Protectionist fears rose following the election of Donald Trump, but there have been few movements towards increasing trade barriers. However, recent attempts to pull out of NAFTA or indications the White House might use national security grounds to place tariffs on steel and aluminium suggest the US administration may yet be planning to follow through on campaign promises. In this vein, fiscal policy in developed markets also remains a key question – will Washington overcome political gridlock to implement fiscal reforms or at a minimum cut taxes, or will Germany respond to IMF calls for increased public investment? We don’t have all the answers, but hope to bring clarity to the most pertinent questions.