Global Economic Outlook – November 2016

Editorial

Global trade growth is grinding to a halt. Asia, the fastest growing region in GDP terms, has seen its trade volumes shrink at an accelerating pace in the first half of the year. Together with the United States which is experiencing flat trade growth, these regions are driving the slowdown. While it is still early to pinpoint a precise, comprehensive explanation for the size of the decline, there is a number of developments that has come to the fore recently that may be of help. They are documented in more detail in this Outlook.

The Asian trade decline has largely been caused by Chinese trade contraction. This has perhaps easily contributed to the slowdown and rebalancing of its economy. The impact of lower economic growth on trade seems straightforward. The one of Chinese rebalancing towards services, which are less trade-intensive than production, is already less so. Even more opaque is an underlying fundamental: the role of China as the “world’s factory”. China simply moves up the value chain, causing far fewer imports, exports, and re-imports as products move from intermediary to end-product. Moreover, with energy and commodity prices low, predominantly due to reduced Chinese demand and investments, Asian and global trade have been depressed as well. Capital goods production, which is trade intensive, is putting pressure on trade as well. These factors are compounded by ongoing finance constraints to the tune of USD 1.6 trillion and further accumulation of protectionist measures.

These developments as such already call the relationship between trade growth and economic growth into question. But matters for trade are made far worse by political developments. These are flatly trade unfriendly, as signalled not only by the Brexit vote in the UK, but also by the stalling of the regional trade liberalisation efforts like TPP (US/Asia), TTIP(EU/US) and even CETA (EU/Canada). Anti-trade rhetoric by US president-elect Donald Trump during the election campaign make matters even worse. The climate has changed; we will see that in future trade data. To what extent is unclear. What is however clear, is that – with all this uncertainty – trade has become far more difficult to forecast.

Hampering trade bodes ill for global economic developments, which are still  depressed by lack of demand in the advanced economies and idiosyncratic issues in a number of emerging economies such as Brazil, Turkey and Russia. Indeed, with global GDP forecast to grow 2.8% in 2017, the qualification ‘slow’ that we provided in our May Economic outlook remains warranted. Nevertheless,  the pressure on growth in the emerging economies is easing, driven by strong growth in India, bottoming out of energy and commodity prices and the ongoing search for yield as global monetary conditions remain soft. Meanwhile, the insolvency climate is not expected to change much with the figures in the majority of countries remaining significantly above pre-crisis levels. Special attention is warranted in the emerging economies where insolvencies are on the rise, with the exception of India. As opposed to the link between trade growth and GDP growth, the link between insolvencies and GDP growth remains stable – at least so far.

John Lorié, Chief Economist Atradius

 

Executive summary

Pressures on international trade are mounting around the globe. Particularly from China where the economy is rebalancing away from manufacturing exports to the US and Europe where the popular tides are turning against trade liberalisation. The global  outlook is now subject to exceptional uncertainty and the link between global trade growth and GDP growth seems broken. GDP growth is expected to pick up in 2017, although this forecast is marked by significant downside risks, including further negative surprises regarding global trade.

Key points

• The global economic outlook in 2016 is largely unchanged: world GDP growth is likely to slow to 2.5% in 2016. In 2017, growth is forecast to accelerate slightly to 2.8% on the back of a pick up in growth in emerging economies.  
• The recovery in the eurozone has been steady but it appears that headwinds are getting stronger with 1.6% growth forecast in 2016. Headline figures for the US have disappointed, now projected at 1.5%, due to low inventories. UK growth has fully rebounded to 1.9% from the post-Brexit downward revisions. 
• The 0.3% contraction in total growth in Latin America is finally bottoming out as policymakers have taken a more orthodox direction. Growth is picking up in Eastern Europe to 1.5%. Asia-Pacific remains the fastest-growing region with growth of 5.7% forecast this year. 
• Insolvencies in advanced markets are on track to be flat in 2016. Emerging market economies are facing rising insolvencies, though the magnitude is lower than previously expected as several key markets emerge from recession

The global economic situation has stabilised since the turbulence seen in late 2015 and early 2016, led by emerging markets where slowing growth has begun easing and even rebounding. Advanced markets continue to face slow but steady growth, but their outlooks are increasingly clouded by uncertainty. The key global trends identified in Chapter 1 of this Economic Outlook are: the sharp slowdown in international trade; the tentatively positive outlook for oil and commodity prices; the stabilisation of international financial markets and the search for yield in EMEs; the limitations of monetary policy and the need for fiscal policy to pick up the slack.

Risks to the outlook lean heavily to the downside. GDP forecasts for this year and next could be revised significantly downward in the case of (1) misguided, surprise monetary policy steps in the US, (2) a further slowdown in eurozone growth, or (3) a hard landing in China. While the likelihood of these events in our forecast period are low, the global impacts would be very high. More moderate impacts would come from (4) a failure of trade to pick up again or (5) a rapid rise in global oil prices but these are both more realistic risks.

Chapter 2 presents the advanced economies that continue to enjoy demand-driven recoveries, but there are significant headwinds coming up in each market. The strong USD and low investment has weighed on the business environment in the US while the outlook has turned much more uncertain following the November elections. The eurozone, growing below potential due to structural issues and crisis legacies, is facing significant political risks of its own. The UK, while enjoying a strong year so far, supported by the weak pound, is stepping into the unknown in 2017 as the negotiations to leave the EU should begin in March.

Emerging market economy growth appears to be bottoming out, as analysed in Chapter 3. New leadership and more orthodox macroeconomic policies are driving recoveries in Latin America, such as in Brazil and Argentina. Gradually recovering commodity prices are easing pressure on national finances and supporting growth in exporting countries like Russia and some markets in MENA and Africa. China’s economy is slowing but still stable and will likely remain so in our forecast period. Accelerating growth is projected in 2017. Many EMEs remain vulnerable though to US monetary policy normalisation and capital outflows but shock absorption capacity has improved significantly compared to past bouts of market volatility.

In Chapter 4 the implication of these global developments for businesses around the world is explored. In advanced economies, no improvement in insolvency growth is forecast after a 7% decline in 2015, in line with their stagnating recoveries. Insolvencies are structurally higher in the eurozone (periphery), while postponed investment and higher production costs in the UK are likely to increase the rate of business failures. Low commodity prices have slashed business investment in the US and other resource rich countries like Canada and Norway, but the improving outlook is also likely to be reflected in their business environments. Insolvencies are expected to rise in most large EMEs except India. The commodity price is especially urgent for EME commodity-exporters, which aids stabilisation and the return to growth in markets like Brazil and Russia. Poor trade opportunities and vulnerability to external financial flows could continue to weigh on corporates across EMEs in 2017.