5 July 2017

Four Economic Issues to Watch in the Second Half of 2017

So far, 2017 has proven to be largely a year of more of the same for the global economy.  Sure, there have been some major developments over the first six months of this year, but the overall performance of the global economy so far this year has been in line with that of previous years.  Some economies have had a better start to the year than expected, most notably China and Europe, both of which had been expected to experience slight slowdowns this year, but instead have seen growth rates tick slightly upwards.  In contrast, economies such as the United States and India performed a little worse than expected in the early part of this year, although both of these economies are expected to strengthen in the months ahead.  One things that is certain, and that was expected, was that politics would play a major role in the direction of the global economy in 2017 and this has proven to be the case, a trend that will certainly continue in the second half of the year.  As such, the outlook for the second half of 2017 remains mixed, with many variables in play that can shift the direction of the economy in the coming months.  Here are four variables to watch in the second half of the year.

Global Uncertainty: One thing that is certain is that the level of uncertainty facing many of the world’s leading economies is as high now as it has been in recent years.  For example, while consumer confidence levels are relatively high in most major economies, business and investor confidence levels have been mixed, particularly in key economies such as the United States and China, as well as in many of the world’s largest emerging markets.  Much of this uncertainty stems from politics, as the dramatic shifts in economic policy in the US and elsewhere have spooked businesses and investors, leading to hesitation in terms of investing and spending by many businesses and investors until the political climate stabilizes.  Furthermore, rising risks levels in many key economies (such as China’s rising debt levels or Europe’s fragile banking sector) are also adding to the level of uncertainty facing businesses and investors in the second half of this year.

Growth Ceilings: Overall, the global economy is not picking up as much steam as had been hoped for this year.  After five years of global economic growth of around just 3% per year, it is clear that the global economy is finding it more difficult to generate the levels of growth that it did prior to the global financial crisis.  Much of this is the result of the fact that growth ceilings, the factors that cap a country’s sustainable level of economic growth, have fallen significantly over the past decade.  For example, the growth ceiling in the United States in the 1990s was around 4%-4.5%, but today has fallen to no more than 2.5%-3.0%, with the US failing to achieve an annual rate of economic growth of more than 3% in each of the past eleven years, the longest such stretch of sluggish growth in US history.  In Europe, the growth ceiling is closer to 2.0%-2.5%, a level at which the European economy is bumping up against right now.  Japan’s growth ceiling is even lower, at around 1.0%-1.5%, due largely to its demographic constraints.  Meanwhile, the growth ceilings in many emerging markets have fallen significantly in recent years, most notably in China, where declining working-age population growth and falling export competitiveness have combined to bring an end to the days of double-digit GDP growth rates.

The Threat of Protectionism: While the threat of protectionism has risen sharply over the past year, many of the protectionism-related fears held by businesses and investors did not materialize over the first six months of this year.  However, the threat of protectionism continues to loom large and is casting a giant shadow over the global economy in the second half of 2017.  Much of this protectionism is emanating from the country that has been the champion of free trade and investment over the past 75 years, the United States.  With the Trump Administration continuing to threaten to implement protectionist policies such as the scrapping of NAFTA or the imposition of sanctions on countries perceived to be breaking global trade rules, the world’s largest economy will be a source of concern for many businesses and investors.  Meanwhile, the threat of trade wars is likely to continue to rise in many areas of the world as protectionism proves to be popular with electorates in many countries.  This is placing many economies at risk, most notably those economies that are dependent upon exports for much of their growth.  As such, protectionism will remain a major threat to the health of the global economy in the coming months, and could result in lower rates of growth in many areas of the world.

Commodity Prices: Despite the expectations of many economists, commodity prices have barely risen over the first six months of this year, as a number of factors such as oversupply and weaker-than-expected demand have combined to hold down the prices of many important commodities.  This has been a key factor in the struggles of many economies this year, particularly those emerging markets that remain dependent upon commodity exports for much of their growth.  A good example of this is the oil sector, as oil prices are currently more than 10% lower than they were at the start of the year, despite the fact that OPEC and many non-OPEC oil-producing countries have cut their oil output this year in a bid to raise the price of oil.  Similarly, many other natural resource prices have failed to rise as expected this year.  The same holds true for food prices, which in many cases are significantly lower now than they were last year.  All of this is combining to remove what had been the key source of growth for many of the world’s leading emerging markets, including economies such as Brazil and Russia.  As a result, growth rates in these economies will remain well below their potential, reducing growth opportunities for businesses and investors around the world.