Global Economy Reviews

13.04.2018 13:25 World Economy Review - March 2018

World trade in goods is maintaining a robust recovery, but it still might falter if trade tensions escalate further, the World Trade Organization said in its annual forecast.

Trade in goods will grow 4.4 percent this year after a decade averaging 3.0 percent a year following the financial crisis. Last year it grew 4.7 percent - much higher than the 3.6 percent forecast in September - and a further 4.0 percent rise is expected in 2019, the WTO said.

“However, this important progress could be quickly undermined if governments resort to restrictive trade policies, especially in a tit-for-tat process that could lead to an unmanageable escalation,” WTO Director-General Roberto Azevedo said in a statement. “A cycle of retaliation is the last thing the world economy needs.”

The United States and China have threatened each other with tens of billions of dollars` worth of tariffs in recent weeks, leading to worries that Washington and Beijing may engage in an all-out trade war.

The WTO`s 2018 forecast puts world trade growth at the top end of previous expectations, since the organization said last September that it expected 2018 growth of 1.4 to 4.4 percent, most likely around 3.2 percent.

The latest forecast raises that to 3.1 to 5.5 percent based on current GDP forecasts, but “a continued escalation of trade restrictive policies could lead to a significantly lower figure,” the WTO said.

“These forecasts do not, and I repeat, they do not factor in the possibility of a dramatic escalation of trade restrictions,” Azevedo told a news conference.

“It is not possible to accurately map out the effects of a major escalation, but clearly they could be serious,” he said. “Poorer countries would stand to lose the most.”

New trade restrictions could trigger cycles of retaliation that weigh on global trade and output, but disruption could equally come from central banks raising interest rates rapidly or from geopolitical tensions, it said.

Cyber attacks were a further risk, with potentially even greater impact on trade in services than trade in goods. Trade in commercial services grew by 7.4 percent in 2017, after two years of weak or negative growth, the WTO said.

Last year`s growth in goods trade was led by Asia, by investment spending and by higher commodity prices. China`s rebalancing away from investment and towards consumption could mean it imports fewer capital goods, putting a drag on world trade growth.

“Less investment could also help reduce overcapacity in sensitive sectors such as steel and aluminum, thereby alleviating trade tensions,” the WTO said.

Steel and aluminum were the targets of one of U.S. President Donald Trump`s three big tariff announcements this year, each more controversial than the one before.

The steel and aluminum tariffs, justified on national security grounds, came soon after a restriction on imports of solar panels and washing machines. They preceded a huge package of tariffs that Trump has proposed to punish China for its alleged theft of U.S. intellectual property.

China`s commerce ministry said that Washington`s attempts at dialogue were not sincere and vowed to retaliate should Trump escalate further.

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14.03.2018 15:09 World Economy Review - February 2018

In another sign that the “Asian century” has arrived, China is on course to overtake the euro area in the size of its economy this year.

China`s gross domestic product is forecast to reach about $13.2 trillion in 2018, beating the $12.8 trillion combined total of the 19 countries that use the euro, according to data compiled by Bloomberg. In 2017, the euro cohort edged China by less than $200 billion.

“It`ll overtake and then persist,” said David Mann, Singapore-based global chief economist for Standard Chartered Bank. “It`s a function of the economic system, institutional infrastructure, education and hard infrastructure -- all of which have been moving in Asia`s favor.”

Asia -- including powerhouses Japan and India as well fast-emerging emerging nations such as the Philippines and Indonesia -- already crowded out the combined economies of North and South America in 2016, according to data compiled by Bloomberg. And the faster average growth pace in Asia is set to be a boon to that yawning gap for many years.

China`s leaders, convening in Beijing for the National People`s Congress, have doubled down on President Xi Jinping`s ability to keep growth stable, having removed the limit on his rule. The world`s second-biggest economy is weathering a gradual slowdown as Xi tries to manage a shift from the low-wage, high-exports model of the past to a more balanced mix where stronger domestic spending plays a greater role.

To do so, China faces numerous challenges. It will have to manage ballooning debt, financial markets need to open to global investors, and the government will have to adjust to a rapidly aging population. The UN projects that a quarter of its residents will be over 60 by 2030.

China should grow at a pace of at least 6 percent for the rest of this decade and keep up a 5 to 5.5 percent rate throughout the 2020s, Mann projected. He said it`s hard to argue that growth in the euro area would be much above 2 percent for the next couple of decades.

While it`s tricky to compare the growth data across large swaths of time, the best guess as to the last time China`s economy overshadowed Western Europe was around the mid-1800s, said Aditya Bhave, global economist at Bank of America Merrill Lynch, citing figures compiled by the Maddison Project at the University of Groningen in the Netherlands.

China`s rising trajectory would help return the global economy to a state that`s persisted through most of history, with the last 150 years being an outlier in which Western economies outweighed those in the East, Mann said.

“China`s rapid re-emergence as an economic powerhouse -- remember it used to be the world`s largest economy in the 1800s -- has enormous implications,” said Rob Subbaraman, head of emerging market economics at Nomura Holdings Inc. in Singapore.

“The impact of China on global financial markets and commodities is no longer trivial. But its economic size also brings economic tensions in terms of market share competition in trade and investment” as well as foreign policy tensions, according to Subbaraman.

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13.02.2018 16:52 World Economy Review - January 2018

The International Monetary Fund said that it expects global growth of 3.9% this year and in 2019, an increase of 0.2 percentage points over the rates it predicted in October. It would be the quickest expansion since 2011.

The fund said that changes to the U.S. tax code approved in December were responsible for roughly half of the boost to growth.

"The revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes," the group said in a report published ahead of the World Economic Forum in Davos, Switzerland.

The IMF expects the U.S. economy to grow by 2.7% in 2018, significantly faster than its earlier prediction of 2.3%. Growth will slow to 2.5% in 2019, but that`s still much faster than the IMF`s previous forecast of 1.9%.

America`s top trading partners will also see benefits, especially Canada and Mexico.

But the fund cautioned that the positive effects of the U.S. tax changes, which include a lower rate for corporations, would be fleeting. It said that expiring tax provisions and larger fiscal deficits brought on by the tax cuts would drag growth lower, starting in 2022.

The IMF found other reasons for optimism, saying there were "notable surprises" of faster growth in Europe and Asia.

The Eurozone economy is expected to grow by 2.2% this year and 2% in 2019, up from earlier estimates of 1.9% and 1.7%. Growth will hit 6.6% this year in China, and 7.4% in India.

"This is very good news ... but political leaders need to remember that the growth reflects a set of circumstances that will not last," said Maurice Obstfeld, the IMF`s economic counsellor.

He said that policy makers should seize the opportunity to work on "difficult reforms" to tackle inequality, reduce debt and prepare for the next crisis, which he said might be "closer than we think."

Britain, which will leave the European Union in March 2019, will be one of the few countries to miss out on stronger growth. The IMF now expects the country`s economy to expand by just 1.5% in 2018 and 2019.

The IMF said that the global economy is likely to maintain its momentum in the short term, barring a correction in financial markets.

But it also identified several risk factors that could hamper growth over the longer run, including inequality, climate change, political instability and "inward-looking policies" that could result in barriers to trade.

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12.01.2018 21:49 World Economy Review - December 2017

The global economy may this year see its fastest growth since 2011, driven mostly by African countries. It will also be its most energy-hungry ever, according to the latest Global Economy Watch (GEW) forecast by PwC.

"Among the 17 countries with a faster economic growth than China will be India, Ghana, Ethiopia and the Philippines, which will lead to a broader growth in Africa and the Asian economies. According to our GEW, of the ten fastest growing economies, eight could be African," said Csaba Polacsek, business advisory partner at PwC Hungary.

PwC released its final Global Economy Watch of 2017, with predictions for 2018. According to a press release sent to the Budapest Business Journal, one of the main findings of the final GEW of last year is that global economic growth may be the fastest since 2011.

PwC says that the global economy will likely grow by almost 4% in purchasing power parity (PPP) terms. More importantly, it stresses, this growth is expected to be broad-based and synchronized, rather than dependent on a few countries.

The main engines of the global economy (the United States, emerging Asia and the Eurozone, which comprised 60% of world GDP in 2017) are expected to contribute almost 70% of economic growth in 2018 in PPP terms, compared to their post-2000 average of around 60%, PwC says.

PwC also expects that this year will be "the beginning of the end of easy money," with the European Central Bank (ECB) likely to further reduce its monthly asset purchases in 2018. Generally, PwC expects monetary policy to somewhat tighten in the G7, reflecting closing output gaps in some advanced economies and stable inflation expectations.

The global economy is on course to consume almost 600 quadrillion British thermal units (BTUs) of energy this year, double its 1980 level and the highest level on record, PwC predicts. India and China together will consume about 30% of global energy, which will be about six times more than the African continent. Reflecting the slow shift towards renewable energy sources, 10% of global energy consumption is expected to be in renewables, with China consuming twice as much renewable energy as the United States, PwC says.

As for oil prices, PwC expects them to remain broadly stable in real terms in 2018. In November, OPEC and its allies agreed to extend the 1.8 million barrels per day (mb/d) supply cut until the end of 2018. Though part of OPEC, Iran was permitted a lower cut, to 10.05 mb/d, as it recovers from nuclear-related sanctions. This is likely to keep oil output growth modest, provided the deal proves viable over time.

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11.12.2017 17:43 World Economy Review - November 2017

The global economy improved in 2017 and will reach an eight-year high next year according to the Organization for Economic Co-operation and Development. But needs private investment to sustain growth into 2019.

The organization nudged up its estimate to 3.6 percent for this year from 3.5 percent in its last forecast to reach 3.7 percent in 2018.

Catherine Mann, OECD Chief Economist, says several factors contributed to the improved economy.

“First there has been a continued monetary policy accommodation,” she explains. “But perhaps some people don`t know that actually there is quite a bit of fiscal stimulus in the system and that is added to the growth. The third element is that trade has recovered and it`s moving along quite smartly right now.”

With its strongest growth in a decade, the euro area was also seen outpacing other major developed economies this year and was up on previous forecasts. The OECD forecasts growth of 2.4 percent for 2017 dropping to 2.1 percent in 2018.

“There is no question that 2017 is a much better year for the euro area,” says Mann. “What we would like to do is to ensure that the momentum that is in place right now continues through 2018 and 2019.”

But Brexit means Britain is missing out on global growth. The OECD`s 2017 growth forecast of 1.5 percent makes Britain the weakest economy in the G7.

`Well there is uncertainty and there is a timetable for resolution of those uncertainties,” says Mann. “What we need to do is get to the position of a close economic relationship between the UK and the EU, that is better for both of them.”

UK Banks though seem to be ready for the worst case scenario. For the first time since the financial crisis, all of the UK`s biggest lenders have passed the Bank of England stress tests.

“Informed by the stress tests at our own risk analysis, the Financial Policy Committee also judges that the banking system can continue to support the real economy even in the unlikely event of a disorderly Brexit,” said Bank of England governor, Mark Carney.

But the OECD says high consumer debt coupled with stagnant household income is still a major financial stability risk in the UK.

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