Introduction Global Economic Outlook, Q3 2017

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​In this issue, our team of global economists examines the issues and economic trends in the United States, China, Eurozone, India, Japan, United Kingdom, Russia, and Turkey, along with a special article on the rising sentiment against globalization.  

Introduction

At a time when the global economy appears to be accelerating, the two leading economies of the English-speaking world are not participating. The UK economy is evidently slowing, while the US economy simply continues to grow at a modest pace—albeit in the context of full employment. Likewise, the Chinese economy is also stabilizing at a moderate rate of growth. Meanwhile, the Eurozone and Japan show signs of acceleration, as do many of the major emerging economies such as Turkey and Russia, both of which are discussed in this report. One exception is India, which shows signs of slowing. Yet the overall trend is positive. Indeed, the central banks of most of the major developed economies are either starting to normalize monetary policy or are thinking about it. Perhaps the most significant threat to the health of the global economy is the specter of protectionism. In this edition of Deloitte’s Global Economic Outlook, all of these countries and issues are examined.

We begin with Patricia Buckley’s discussion of the US economy. She notes the demographic constraints on growth, not only influencing the supply side of the economy but also hurting the growth of domestic demand. Weakness in exports, emanating from a strong US dollar, has also suppressed growth. Patricia expects, however, that the dollar will not rise any further and may decline, possibly leading to an improvement in exports. Finally, she says that significant uncertainty about the future of policy means that it is fruitless to speculate on the potential impact of policy changes.

Next, I examine the economic situation in China. There economic growth has stabilized, while foreign currency reserves have started to rebound as capital controls have helped to stabilize the currency. However, the rising volume of debt has created a greater perception of risk, leading to the downgrading of the country’s sovereign debt. Meanwhile, the possibility that China could obtain market-economy status threatens to boost trade tensions between China and the United States.

In his article on the Eurozone, Alexander Börsch notes that the region has hit a sweet spot, with accelerating economic growth, rising employment, and diminishing political risk following favorable election results in France and elsewhere. However, he also notes that other risks remain, including upcoming elections in Italy and Austria, as well as the potential fallout from the Brexit process. By country, Alexander says that Spain’s situation is “dynamic,” Germany’s is “rosy,” and the recoveries in France and Italy are “moderate, but gaining momentum.”

India is the subject of our next article by Rumki Majumdar. She notes that there were signs of slowing economic activity even before the controversial demonetization. Although she says that there may be some short-term negative effects from the implementation of the goods and services tax (GST), over the long term, it could generate faster economic growth. She says that “the new tax regime is expected to improve the ease of doing business,” thereby boosting growth.

In our next article, I look at the economic situation in Japan. The economy is accelerating, as evidenced by a variety of economic indicators. Moreover, the International Monetary Fund now says that the economic policy mix in recent years has been a success. Plus, despite the shelving of the Trans-Pacific Partnership, the government is actively seeking opportunities to expand trade, having just reached an agreement with the European Union to ease trade barriers. On the other hand, onerous demographics continue to suppress growth and create budgetary challenges.

Ian Stewart then offers his take on the British economy. He discusses how the sharp drop in the British pound following the Brexit referendum has boosted inflation and suppressed consumer spending growth. Moreover, uncertainty following the recent election means that the Brexit process will likely render a hard exit. On the other hand, Ian says that there are some mitigating factors that should help the British economy. A cheaper pound and an accelerating global economy are likely to boost exports, inflationary pressures could ultimately ease once the currency impact tapers off, and fiscal and monetary stimulus could helpfully increase.

Next, Lester Gunnion examines the Russian economy. He discusses the rebound in growth. In addition, he looks at the Russian government’s policy of import substitution, meant to boost domestic production in the non-energy sector. While it might have short-term benefits, it is fraught with risk. Lester notes that “import substitution leads to the transfer of resources from efficient sectors of the economy that function competitively without protectionism to inefficient protected sectors of the economy.” Lester also discusses Russia’s difficulty in obtaining funding from the West given the sanctions regime, and its decision to pivot to China.

In our next article, Akrur Barua discusses the turnaround in Turkey’s economy. He says that this is driven by more political certainty, fiscal stimulus, stronger demand for Turkish exports, a return of tourists, and strong household spending. On the other hand, he notes that investment remains weak, thereby boding poorly for future gains in productivity. He also discusses the risks Turkey faces due to inflation and a large current account deficit.

Finally, in our last article, Rumki Majumdar examines the slowdown in the growth of trade and the rising sentiment against trade liberalization. She reviews the recent evolution of trade policy in major economies and the behavior of trade between major countries. And, although she notes the costs of globalization, she says that a move away from globalization carries greater costs and few benefits. She discusses how policy ought to involve further trade liberalization along with a greater effort to address the concerns of those sidelined by globalization.