2017 economic outlook: Off to a strong start

“Growth forecasts have been revised upwards for 2017”. The recent message from the International Monetary Fund (IMF) perfectly summarises a feeling largely shared by economists that the global economy is doing better. This message not only boosts confidence but also puts us in a better position to face up to the uncertainties looming on the horizon.

For economists and the financial markets, economic surprises are a key source of information. They show the extent to which activity, demand and confidence figures exceed – or fall short of – consensus expectations. It allows to update the assessment of the economic environment and the forecasts based on the most recent information. And now for the good news: for the past several weeks, we have seen positive surprises in the United States, the eurozone and the emerging countries in general. The synchronisation of positive indicators is rather rare, and illustrates the co-existence of several mutually beneficial factors.

With very low interest rates in several countries, the monetary environment is a global support factor. The same can be said for China’s major stimulus efforts, which have helped stabilise growth rates while creating a gearing effect on trading partners, including the eurozone.

From a regional perspective, oil prices have picked up again, eliminating the cataclysmic scenarios that were feared in early 2016, and providing a shot in the arm for oil exporting countries, and Russia in particular. In the eurozone, the recovery now seems to be firmly anchored, providing an undeniable support factor for corporate and household confidence, which is also bolstered by European Central Bank policy.

In some places, improvements are taking shape for purely country-specific reasons. This is notably the case for Brazil, where a new credible economic policy introduced in 2016 has fostered capital inflows and currency appreciation. As a result, inflation has fallen sharply, paving the way for major monetary easing.

Another justification for the upward revision of growth forecasts is the new US president’s promises of a fiscal stimulus. Despite the lack of details on the promised measures (when, how much, and what exactly), the simple prospect has triggered a rebound in the stock markets and in long-term interest rates. The bond markets expect the Fed to be more inclined to raise key rates, the inevitable consequence of introducing an expansionist fiscal policy at a time when the economy is at full employment and there are numerous early warning signs of accelerating inflation.

The dollar is bound to strengthen, which would be welcome news in the eurozone. The favourable impact on exports would help counterbalance the headwinds from the UK, where the negative economic consequences of Brexit are expected to become more tangible. To quote a member of the Bank of England’s monetary policy committee: a slowdown in slow motion will still end up having an impact. It is a safe bet that when Article 50 of the European Treaty is triggered, it will increase feelings of uncertainty, especially after the tough stance adopted by the UK prime minister.

Between US fiscal policy, the Fed’s reaction, Brexit negotiations, elections in several European countries, the risk of protectionism and the geopolitical environment, the list of uncertainties is long as the new year gets underway. The financial markets will certainly “play” on these themes. Yet as we mentioned before, the favourable economic environment should allow us to approach all this uncertainty more serenely.

William De Vijlder

Group Chief Economist, BNP Paribas