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Top Three Trends in Economy, Finance and Trade in 2017

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Uncertainty is going to be the dominant theme in the global economy in 2017. Continuing political, policy, and economic volatility around the world pose risks of further inertia due to a “wait-and-see” sentiment in the private and public sectors. Global companies should be ready for more disruptions that might arise given the geopolitical uncertainty and financial market volatility in developed and emerging countries.

Top three trends for Economy, Finance and Trade to watch in 2017 are:

  • Unfolding uncertainty after the US elections with global spillovers
  • Political risks threatening to impede economic growth in Europe
  • Increasing pressure of over-indebted Chinese corporate sector

Unfolding uncertainty after the US elections with global spillovers

The victory of Donald Trump in the US presidential elections is yet another political shock to the economies of the developed world. There is an unusual amount of uncertainty about Trump's actual policies in 2017. The US congress and senate might moderate some of controversial trade and immigration policies, but Trump’s actions so far suggest that it might prove to be difficult. If fully implemented Trump’s planned policies could significantly boost the risks of a more severe US slowdown or a more general stagnation of the global economy:

  • The main downside risks are worse than expected increases in trade tariffs and immigration restrictions. These could cause a downturn in the US economy, with GDP growth falling to 0.9% in 2017;
  • Milder Trump’s actions combined with the larger than expected and more effective stimulus of infrastructure spending and tax reforms could result in US GDP growth of 2.8% in 2017;
  • On the global scale, Trump's actions augment uncertainty in terms of US foreign policy stances, such as trade wars with China, a wall with Mexico, involvement in multinational agreements and attitude towards some of the EU policies.

Real GDP y-o-y Growth Forecast in the US Under Different Scenarios: 2016-2018

This chart outlines forecast gdp growth rates through Q4 2018 in the case of a fiscal stimulus boom, an optimistic forecast, a pessimistic forecast and a major downturn benchmarked against the Euromonitor baseline forecast.

Source: Euromonitor International Macro Model

Political risks threatening to impede economic growth in Europe

The USA is not the only country to witness the rise of anti-trade and anti-immigrant populism. Right-wing parties are gaining ground across Europe, which adds up to significant political uncertainty:

  • UK Prime Minister Theresa May intends to trigger Article 50 in March 2017 and start lengthy negotiations with the EU. Continuing uncertainty about Brexit outcome is estimated to slow down the UK demand and add to vulnerability of other European economies in 2017;
  • French presidential elections in April-May 2017 could play a decisive role in the direction of the EU in the coming years, as a victory of anti-EU National Front leader Marine Le Pen is possible. Trump’s surprise election in the US has raised the prospects that political polls are underestimating the strength of right-wing populism and anti-immigration sentiment;
  • Right-wing populist party Alternative for Germany hopes to enter the German parliament in a national election in September 2017, riding sentiment against German Chancellor Angela Merkel’s immigration policy;
  • In Italy, the reformist Prime Minister Matteo Renzi resigned at the end of 2016, after losing the constitutional referendum, strengthening the anti-EU Five Star Movement in the next elections, due in 2018 but which could be brought forward to 2017.

A broader advanced economies' stagnation would notably hurt the outlook of European countries. The spread of political populism across the region would slowdown the implementation of structural reforms and raise private sector pessimism, resulting in negative spillovers on investment and consumer spending.

Real GDP y-o-y Growth Forecast in Major European Economies Under Different Scenarios: 2015-2018

This chart plots the euromonitor baseline forecast against the scenario of AE stagnation beginning in Q3 2017 through Q4 2018 in the UK, Germany, France and Italy

Source: Euromonitor International Macro Model

Increasing pressure of over-indebted Chinese corporate sector

High credit growth is anticipated to persist in China during 2017, despite the recently introduced government’s measures to fight excessive debt levels. China's private non-financial sector debt to GDP was estimated at over 200% in mid-2016, rising nearly two times faster than country’s GDP. Bad loans are a particular cause for concern adding to a high probability of a banking crisis over the next three years. The government has recently started taking actions to tackle the growing amount of debt:

  • Heavily indebted firms ("zombie enterprises") are encouraged to file for bankruptcy, and banks to write off their loans;
  • Chinese cities have introduced property sales restrictions and China's top banks were ordered to reduce real estate loans.

While the new governmental policy statements may restrain some of the excess lending, they are unlikely to be enough to stabilise China's credit markets.

Private Sector Debt to GDP Ratio and Private Sector Debt y-o-y Growth in China: 2011-2016

This chart plots China's private sector Debt to GDP ratio over y-o-y private sector debt growth.

Source: Euromonitor International from FRED and national statistics

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