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A Crystal Ball and Some Econometrics

A Crystal Ball and Some Econometrics

The global economy decelerated to 3.1% growth in 2016, the slowest pace since 2009, according to the estimates published by the International Monetary Fund in January 2017.

In the United States (the main economy in the world, with a contribution of around 25% to the global GDP), the economy increased by only 1.6% YoY in 2016, according to the Bureau of Economic Analysis reports. The worst performance since 2011 was mainly caused by the deterioration of the fixed investments, given the accumulated effect of several challenges. However, the investment climate stabilised at the end of 2016, an evolution influenced by the euphoria of the financial markets after Donald Trump won the Presidential election.

The Euro Area economy also decelerated in 2016, according to the flash estimates issued by Eurostat at the end of January (1.7% YoY). Observers may notice the consolidation of the domestic demand, determined by the expansionary monetary policy implemented by the European Central Bank.

Last, but not least, China’s economy continued the transition process last year (towards an economy more dependent on the domestic demand as an engine for growth) and registered a YoY growth pace of 6.7%, the slowest since the 1990s, when its absolute values were much lower.

From forecasting… 

Among the risk factors for the dynamics of the global economy in the short and medium term, one can mention: the economic policy-mix in the US (including the perspective of implementation of protectionist measures), the EU / Euro Area challenges (institutional, banking, structural reforms), China’s readjustments (dealing with the high level of total debt), as well as the various geopolitical tensions.

The global macroeconomic indicators have recently improved towards the beginning of 2017, before the Trump Administration’s anticipated protectionist measures, which could have future unfavorable consequences for global trade and investments. For instance, the global manufacturing PMI (Purchasing Managers Index) recently consolidated at 52.7 points, the highest pace of the past 34 months, according to the JPMorgan/Markit Economics indicator. At the same time, the global services PMI continued to increase to 53.9 points, the highest pace since mid-2015. As regards the financial markets, one can notice a rotation of the capital flows over the past weeks, determined by the increase of the inflationary expectations and by the acceleration signs in the real economy. Consequently, the positive momentum on the capital markets consolidated, while the yields rose on the bonds markets. In the US, consumer confidence recently hit the highest level since 2004, while the business climate continued to improve, evolutions influenced by the positive dynamics of the real estate markets, labour markets and credit markets.

These recent evolutions express acceleration prospects for the US in the short-run. Conditioned by the implemention of a balanced policy mix (continuity of the monetary cycle by FED and implementation of responsible fiscal policy by the Trump Administration) the main economy of the world may accelerate towards potential (estimated at around 2% YoY) during 2017-2019. In this scenario, the growth pace of the private consumption would consolidate around 2.2% YoY, while the fixed investments would accelerate in convergence to 3% YoY. On the other hand, the net foreign demand would continue to present a negative contribution to the GDP dynamics in the mid-run, unless border taxes are implemented, as signaled by the Trump Administration.

Overall, we underline the accumulation of end-of-cycle signs for the US economy, mainly in the real estate and labor markets (the unemployment rate may register an upward trend in 2018).

As regards the Euro Area, the dynamics of the economy may consolidate in the mid-run at a pace close to the potential (around 1.7% YoY during 2017-2019). In this scenario, the expansionary monetary policy and the increasing manoeuver margin for the fiscal policy may counterbalance the domestic and global challenges. 

… to financing 

In terms of the financial side of the economy, the inflation rate would converge towards the 2% YoY target, either in the United States or in the Euro Zone, all things being the same.

Given the prospects for the evolution of the real economy around its potential and the perspectives for the convergence of the inflation to the targets of the central banks, it is very likely that the Federal Reserve will continue the post-crisis cycle launched in 2015, while the European Central Bank abandons the unprecedented monetary policy in 2018. In this context, the financing costs in the global economy would continue to increase in the short and medium term, on both sides of the Atlantic, with impact for the consumption and investment decisions.

Among the risk factors for the dynamics of the global economy in the short and medium term, one can mention: the economic policy-mix in the United States (including the perspective of implementation of protectionist measures), the Euro Area (the weak pace of the structural reforms) and China (dealing with the high level of total debt); as well as the EU challenges (institutional, banking, structural reforms) and the various geopolitical tensions.



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