- We forecast average U.S. GDP growth at 2.5% next year.
- Europe's forecast is mixed, but may exceed 2016's growth of 1.5%.
- China GDP is forecast to grow 6.7% in 2017.
We believe global growth will improve in 2017 from 2016, but risks will remain. And the picture is becoming more complicated. During the last two years, global economic growth has been at the weakest levels since the global financial crisis that began in 2008. This slow growth has been driven by several things that we have discussed in the past, including lower oil prices and a stronger dollar.
The key drivers of slow economic growth prompted global weakness in manufacturing, capital spending and international trade, as well as bloated inventories. We believe that some of these headwinds are beginning to ease and may send global economic growth back to levels seen in 2012–14.
U.S. Primed to Bounce Back
The U.S. economy was disappointing in 2016. Capital spending was weak as oil-related investment contracted and global uncertainty resulted in little appetite to expand manufacturing capacity. Inventories were a major drag on growth as industrials and other sectors saw an unwanted buildup in stockpiles. Only consumer spending held up well this year, supported by continued growth in employment and low inflation.
We believe that growth is primed to bounce back in 2017. The rebound in oil prices is likely to eliminate the severe decline in oil-related investment that took place in the last two years. In addition, we believe that inventory levels are much more closely aligned to sales and expect that drag to fade. We think there will be better economic growth in the rest of the world, resulting in better export growth in 2017.
While we still await the outcome of the U.S. presidential election and other political contests in November’s vote, it looks as if there will be a push for infrastructure spending by the next president. If it occurs, it would likely help in late 2017 at the earliest.
We think employment growth will slow as it becomes more difficult to find qualified workers. This slowing is likely to continue to put upward pressure on wages. We believe income growth should continue to be well supported. However, we expect both higher gasoline prices and the increasing burden from health care costs to squeeze the purchasing power of consumers. We believe that consumer spending will be a bit softer in 2017 versus 2016. Overall, we forecast average growth in U.S. gross domestic product (GDP) to be around 2.5% in 2017. Under this scenario, we expect the Federal Reserve (Fed) to hike rates once in late 2016 and twice in 2017.
Mixed Forecast for Europe
Economic growth in Europe continues to be mixed. Germany continued to perform relatively well on the back of consumer spending and construction. Further healing in Spain also resulted in a strong contribution to eurozone GDP growth. In France, terrorist attacks earlier in the year resulted in a pause in the recovery, although the economy looks to be gradually improving. Italian GDP growth continues to lag. While reforms by Prime Minister Matteo Renzi are a positive, recent political and banking uncertainty is proving disruptive to the economy.
Looking to 2017, in general we expect consumption throughout the eurozone to continue at a healthy pace. Export growth is forecast to improve along with better global economic growth. While actions by the European Central Bank (ECB) continued to bring about improvement in bank lending in places like Italy and Spain, we worry that renewed concerns about banks in Italy and Germany could delay further improvement.
Calls for fiscal loosening can be heard across the continent but we believe the actual fiscal boost will be mixed across countries, with Germany saying it will ease while Spain is likely to tighten. We forecast GDP growth in 2017 coming in a bit higher than the 1.5% growth expected in 2016. While the ECB’s quantitative easing (QE) program is scheduled to end in March 2017, we expect an extension of six to nine months.
We believed that the U.K. would fall into recession if its citizens voted to leave the European Union (EU) — the socalled “Brexit.” While we still believe this to be the case, the timing has been pushed into the future. After the Brexit vote, most believed that the U.K. would choose to work out a compromise in which it technically was not a part of the EU, but still retained all of the benefits.
However, Prime Minister Theresa May has increasingly made it clear that the U.K. will seek a full break from the EU, even if it is detrimental to economic growth and business interests. As this becomes accepted and the U.K. begins the process of exit negotiations, we believe a recession in the U.K. will ensue.
We question why any corporation would commit more capital to invest in the U.K. when the relationship with its biggest trading partner is so unclear. We think there will be a decline in capital spending and slowing employment growth, resulting in much weaker overall growth in 2017. The Bank of England (BOE) recently cut rates and began another QE program. We believe the BOE is likely to continue its QE program throughout 2017.
Growth Returns in Japan
Japanese economic growth was little changed in 2016. The continued drag from a declining population and a weak global economy prevented much improvement. Looking into 2017, we expect growth to improve on the back of government stimulus and export growth. We forecast GDP growth of around 1.0% in 2017. In September, the Bank of Japan (BOJ) announced a change to its monetary policy framework by targeting the 10-year government bond yield “around zero” and abandoned its official QE target. We believe that the BOJ will maintain its pace of QE for the time being in an effort to allay fears of tapering the pace of purchases.
Stability in Emerging Markets
We have been negative on emerging markets for several years. With weak global trade, high debt levels in a number of countries, rising U.S. rates and a stronger U.S. dollar, emerging market economies experienced a large slowdown in economic growth, weak currencies and persistent capital outflows. But we believe this is changing.
Emerging market economies seem to be stabilizing and the worst seems to be behind us as their financial markets are now showing capital inflows. We believe that GDP growth in emerging markets has bottomed and expect the strongest growth in three years. This is not to say that growth is strong historically, but we think the risks of recession in the near term probably are behind us. In particular, we believe that the deep recessions of the past two years in countries including Brazil and Russia will end.
In China, economic growth surprised to the upside in 2016. While we believed that the government would support the economy via fiscal spending, we were surprised by the amount it actually spent. We believe the government will continue to stimulate the economy with infrastructure spending and help for consumers.
Property markets have recovered nicely, with prices in larger cities showing rapid appreciation. China’s government recently has been putting on new restrictions in an attempt to slow the pace of appreciation. We believe the tightening will continue on a targeted basis, which should slow the pace of price appreciation and could impact activity in 2017. However, the government cannot tighten too aggressively as housing inventory levels are still too high in a number of smaller cities.
We also believe that the pickup in global economic activity should boost export growth in China. With better export growth and continued government spending partially offset by softer housing, we forecast China’s GDP growth will be 6.7% in 2017, similar to the rate of growth in 2016.
We continue to have a positive outlook on India over the longterm. We think favorable demographics coupled with continuing reforms are likely to bode well for future GDP growth. However, the government recently announced a new tax system that it plans to implement in April 2017. While this tax system is likely to be a positive for future growth, the complexity of the system could cause some disruptions to economic activity at the time of implementation. Thus, we expect India’s GDP growth in 2017 to be slightly less than 2016.
Risks Remain for Economic Outlook
While we are positive on the global economy in 2017, we believe that the risks to our outlook are growing. There will be a number of elections between now and the end of 2017 and all raise questions for the global economy and markets. If Hillary Clinton is elected president in the U.S., will that bring a sweep in Congress and cause market angst about potentially unfriendly business legislation? Will Italian Prime Minister Matteo Renzi lose an upcoming vote on constitutional changes, rendering the rest of his term powerless? Will anti-EU political parties gain power following elections in France or Germany?
In addition, we worry about geopolitical events. The increasingly negative rhetoric between the U.S. and Russia gives us some concern, as does China’s activity in the South China Sea. Further increases in terrorism in the western world could bring about a slowdown in economic activity because of fear and uncertainty.
From a macro perspective, we believe there are risks related to
global monetary policy if it suddenly reacts to rising inflation
and tightens more aggressively than expected. While we believe
the probability is low, it is not zero. The recent increase in the
price of oil and other commodities also has been a positive for the
global economy. If prices rise significantly more in 2017, then we
would carefully watch for evidence of demand destruction in the
global economy and weaker economic growth.
Past performance is not a guarantee of future results. The opinions expressed in this article are those of Mr. Hamilton and are current through October 2016. These views are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed.
WADDELL & REED INVESTMENTS℠ refers to the investment management and investment advisory services offered by Waddell & Reed Investment Management Company, the investment manager of the WADDELL & REED ADVISORS FUNDS℠ mutual funds, which are distributed by Waddell & Reed, Inc.
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