John Greenwood’s annual economic outlook 2017
This year financial markets were stirred by unexpected political events such as Brexit and a Trump victory. With US interest rates on the up and bond yields rising, what is the outlook for the global economy in 2017? Will it bring joy or sorrow?
- Donald Trump’s leadership is likely to bring only a modest upswing to US GDP in 2017
- The European growth outlook remains subdued for the time being and weak in the long term
- The continued Brexit fallout will slow Britain’s real GDP growth, particularly foreign direct investment in the UK
Under Donald Trump’s leadership, US GDP is widely expected to accelerate, but I expect only a modest upswing to 2.4% in 2017 and 2.6% in 2018, not a growth rate of 3.5-4.0% as promised in his election campaign.
Moreover, most of the incremental growth in 2017 will come not from fiscal stimulus, tax cuts or infrastructure spending, but from the strengthening business cycle upswing which Mr Trump has had the good fortune to inherit.
"Most of the incremental US growth in 2017 will come not from fiscal stimulus, tax cuts or infrastructure spending, but from the strengthening business cycle upswing."
Following the 0.25% hike in the US federal funds range in December, I expect the US Federal Reserve will raise interest rates two or three times in the year ahead, taking the target range to 1.00-1.25% by yearend 2017.
In the Euro-area the outlook remains subdued in the short term, and still far from robust in the long term. Recently extended to December 2017, at a reduced rate of €60 billion per month from April 2017, the European Central Bank’s flawed quantitative easing strategy continues to fail to gain traction.
As a consequence the arguments for fiscal easing in Europe are becoming fashionable, but European Commission rules do not offer much scope for change, least of all fiscal expansion backed by monetary acceleration.
The continued Brexit fallout will slow Britain’s real GDP growth, particularly foreign direct investment in the UK. Meantime, the Bank of England’s credit promotion policies implemented in August risk adding domestically generated inflation to imported inflation from weak sterling.
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