Global real GDP growth averaged 2.8% per annum over the period 2010-15. We forecast 2.7% per annum over the 2016-21 period revised from 2.8% previously. The adverse short-term impact of Brexit and the adjustment in our forecast for China shaved 0.1% from the 5-year projected average. Offsetting the downward revision was an upward adjustment to the forecast for US growth amidst clearer signs of a shift to infrastructure stimulus as a means to support growth. Regarding Brexit, we expect a ‘localised’ adverse impact over the short term – mainly in the UK and moderately in the EU – due to the quantum leap in uncertainty. Our current view is that the resolve within the remaining 27-member EU will be strong enough to absorb any challenge, including the Brexit vote. The adverse uncertainty impact will be stronger initially – global growth is forecast at 2.2% during 2016, accelerating to 2.6% next year. Thereafter the momentum is likely to build. China’s growth is forecast to ratchet down to 4.5% per annum, capping the global growth rate at 2.9% (2021).
Regional outlook
Euro area. The immediate Brexit impact appears to have settled down; for one, the pound sterling’s depreciation has stabilised. Whereas the UK economic outlook has been materially affected, the Euro area outlook at this stage seems intact. Brexit still has to happen and it is likely that the EU membership will witness some resistance over a five year time horizon. It is not possible to factor in these likely events, except to downgrade the 5-year forecast. The 5-year average GDP growth rate for the Euro area has been scaled down to 1.5% per annum.
USA. The USA economic recovery from the 2009 recession is probably the most mature amongst the advanced economies. Nonetheless, growth certainly hit a soft spot during 2016. Political uncertainty in the run-up to the November election is a constraining factor, holding back fixed investment spending, including public sector infrastructure spending initiatives. We anticipate a material shift towards public sector infrastructure investment stimulus over the medium term, commencing soon after the new administration is in place early next year. The funding of the infrastructure roll-out is a key issue given the high debt levels; however, we expect private sector involvement and funding via user charges; the elimination of cost-raising regulatory burdens is also likely to be an important objective. We remain with our above-consensus forecast for USA real GDP growth of 2.3% per annum over the period 2016-21.
China. One of the latest measures China adopted to prop-up its economic growth momentum, is a credit target of 13% growth per annum. This is likely to cause a further increase in China’s debt-to-GDP ratio. The problem is that China’s GDP growth has become dependent on accelerating debt, which is not sustainable.
Japan. Monetary and fiscal policies increased growth temporarily (to 1.8% per annum, 2010-13); however, structural reforms lagged. Winning control in both houses of parliament, Mr Abe may be in a better position to implement economic policies. Pending more visible success, we remain with a medium-term growth forecast of 0.6% per annum, 2016-21, i.e. in line with Japan’s economic growth performance over the period since 2000.
Emerging economies. Economic recoveries in Brazil (only next year) and Russia (this year) will support growth in the emerging market universe. The outlook for the Indian economy appears rosy. Medium term growth is projected to pick up from 7.3% per annum (2010-15) to 7.6% (2016-21). Resilience in key emerging economies (such as Mexico, Poland, Indonesia and other East Asian emerging economies) will also be supportive of growth. The post-Brexit environment of lower US interest rates for longer also allows leeway to emerging country central banks to ease monetary policies. The laggards are likely to be the oil- and commodity exporting developing countries and those dependent on external finance.
Pieter Laubscher
6 September 2016