As we enter the New Year, PwC’s economists have once again peered into their crystal ball to make their predictions for 2017. First, to set the scene, a look at the global economic themes that could prevail in 2017.
Globalisation takes a back seat: We expect world trade to grow more slowly than global output for the third consecutive year. The resurgence of economic nationalism in some parts of the world means World Trade Organisation rules will be put to the test. The world’s biggest bilateral trade route (US-China) is likely to come under pressure. In the absence of the Trans-Pacific Partnership and the Transatlantic Trade and Investment Partnership being agreed upon, this trend could continue into the longer-run.
US monetary policy moves back towards normality: The Federal Reserve will continue to tighten monetary policy. Indeed, it is possible that the Fed could tighten faster than currently suggested depending on the pace, size and implementation of the new administration’s fiscal plans. On the flipside, economies which rely on the dollar for financing will come under pressure.
Politics drives uncertainty and economics: The Eurozone may hold half a dozen elections. Germany, France, the Netherlands and potentially Italy and Greece (equivalent to more than 70% of Eurozone GDP) are expected to run general elections and could experience disruption to their normal political cycle. Spain is likely to hold a referendum on the future of Catalonia.
Says Barret Kupelian, senior economist, PwC: “On the international stage, we will be monitoring US-Russian relations closely, which could have spillover effects in Eastern Europe, the Middle East and potentially East Asia, as well as on the Iran nuclear agreement.”
So here are four detailed predictions from PwC’s global team of economists.
The US will drive growth in the G7
For many economies, 2017 will be a year of uncertainty. Although not an exhaustive list, these are some of the key macroeconomic risks businesses should consider and plan for in the next 12 months.
Onshoring the greenback reveals cracks: Tighter US monetary policy could encourage a gradual repatriation of US dollars. Our risk matrix shows that Malaysia, Turkey and Chile are especially exposed to this risk as their foreign currency debt levels stand at 71%, 64% and 55% of their GDP. Banks with exposure in those economies could face some pressure if not well capitalised. But on the flipside, for some commodity-reliant economies like Brazil and Russia, a higher oil (and other commodity) price outlook coupled with a flexible exchange rate regime could help to soften the impact of capital flowing back to the US.
China will feel the costs of higher private sector debt burden: China’s non-financial sector debt stands at more than 250% of GDP. If non-financial debt grows at the same average rate as it has since 2010, China could add over $650 billion to its total debt pile by the end of 2017. China’s relatively closed capital account means its risk rating is medium, reducing its exposure to foreign currencies. But China’s non-financial debt accumulation has accelerated since 2008, nearing the high debt to GDP ratios seen in the Eurozone’s crisis countries. Last year, China’s credit to GDP gap (the difference between the credit-to-GDP ratio and long-run trends, indicating unsustainable accumulation) surpassed levels which indicate a risk of crisis within the next three years. This risk will be heightened if property prices fall sharply, undermining the foundations of the debt pile.
So how did we do with our forecasts for 2016?
Reflections on our 2016 predictions
Looking back on 2016, many of our predictions held true. Commodity prices have remained low, the US raised interest rates and geopolitics has come under the spotlight. Specifically, we correctly predicted that:
We also predicted strong US job creation at around 200,000 jobs a month; preliminary estimates suggest the US added on average 180,000 jobs a month in 2016. But we over-estimated US growth at 3%. Last year, US growth is expected to be relatively disappointing at around 1.5%.
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