Global services exports have been growing strongly, but will this continue?
In the UK, uncertainty remains prevalent following the Brexit vote. However, the national accounts data for the second quarter of 2016 were stronger than expected. In light of this, we have revised up our main scenario projections for UK GDP growth to 1.8% in 2016 (from 1.6%) and to 0.7% in 2017 (from 0.6%). These projections also reflect that fact that the early official data for July have held up reasonably well, notably for retail sales, but it is still too early to make a judgement on the impact of the referendum on the economy in Q3. We will update our projections in more detail in the November edition of our UK Economic Outlook report.
One consequence of the UK’s vote to leave the EU is that global trade has found itself under the spotlight. It is likely to be some years before we get clarity around the trade terms that will exist between the UK and the EU. However, following Brexit, we expect the UK government to pursue trade deals with leading EU and non-EU economies. Given the UK’s relative strength in services, policymakers are likely to place a particular emphasis on liberalising services trade. Over the last ten years, global services exports grew at an annual average rate of around 6.5% and now stand at about $5 trillion.
If the UK is able to secure trade deals with the US and fast growing emerging economies like China and India that make it easier to export and import services, and if an agreement can be reached on the Trade in Services Agreement (TiSA - a global agreement involving 23 WTO members including the EU), then there could be even faster global and UK services export growth still to come.
Focusing on the EU, if the Brexit vote results in the UK losing some of its access to the Single Market, then there may be opportunities for the Central and Eastern European (CEE) economies to attract foreign direct investment (FDI) from the UK. On average, the CEE economies have outperformed the wider EU at attracting foreign investment due, in part, to their low labour costs and relatively fast labour productivity growth. The challenge for policymakers in these economies now is to improve their business environment. If they can do this, then the CEE economies could continue to be among the EU’s star performers in the years to come.
Turning to the US, average monthly job creation to date in 2016 (186,000) has been slightly below our prediction from the start of the year of around 200,000, but the job creation data for June and July were more impressive. If this continues, we would expect the Fed to raise interest rates before the end of the year.