World Economic Outlook

1 World Economic OutlookEconomics World Economic Outlook ...

Author: Toby Nichols

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1 World Economic OutlookEconomics World Economic Outlook 18 August 2016 Sara Johnson, Senior Research Director, Global Economics ,

2 Global economic growth remains subduedUS Economic Outlook / August 2016 Global economic growth remains subdued Global growth will remain below 3% in 2017 as slowdowns in Europe and China offset accelerations in the United States and emerging markets. US economic growth will pick up from 1.6% in 2016 to 2.4% in 2017, led by consumer spending and homebuilding. Economic and political uncertainty will hurt UK investment, consumer spending, and capital inflows, stalling UK growth in the year ahead. Eurozone growth is projected to slow from 1.5% in 2016 to 1.1% in , reflecting increased political instability and banking problems. China’s economic growth will slow further because of imbalances in credit, housing, and industrial markets. Recessions in Brazil and Russia are abating.

3 Markit manufacturing PMIs send mixed signalsUS Economic Outlook / August 2016 Markit manufacturing PMIs send mixed signals (Index, over 50 indicates expansion) Purchasing managers’ indexes Sources: Markit © 2016 IHS

6 Real GDP growth in major economies: August forecastUS Economic Outlook / August 2016 Real GDP growth in major economies: August forecast Real GDP Percent change 2014 2015 2016 2017 2018 World 2.7 2.4 2.8 3.1 United States 2.6 1.6 Canada 2.5 1.1 1.2 Eurozone 1.9 1.5 United Kingdom 2.2 0.2 1.3 China 7.3 6.9 6.6 6.2 6.4 Japan -0.1 0.6 0.5 0.7 1.0 India 7.2 7.5 7.4 7.7 Brazil 0.1 -3.9 -3.1 1.7 Russia -3.7 -1.4 Source: IHS © 2016 IHS

10 Why has growth in world trade slowed?US Economic Outlook / August 2016 Why has growth in world trade slowed? Cyclical forces Slow growth in aggregate world demand Weak capital spending Collapse in commodity markets Limited progress on trade liberalization Structural forces Shift from manufacturing to services Rising trade in data and information, supplanting physical trade Shortening of global supply chains

14 The global crude-oil market returns to balanceUS Economic Outlook / August 2016 The global crude-oil market returns to balance High product stocks will restrain prices in the near term. After significant surpluses in 2015 and the first half of 2016, the global liquids market will return to balance in late 2016 and in 2017. A continuing decline in US oil production into 2017 will be key to supporting oil prices. The United States, China, and India drive global oil demand growth. Reduced economic growth in the United Kingdom and European Union will lead to some modest reduction in oil demand, but the low oil intensity of European countries mitigates the downside risk. The price of Dated Brent is projected to average USD44 per barrel in , USD57 in 2017, and USD64 in 2018.

19 Exchange rates per US dollarUS Economic Outlook / August 2016 Exchange rates per US dollar Canadian dollar Euro Source: IHS © 2016 IHS Source: IHS © 2016 IHS Japanese yen Chinese renminbi Source: IHS © 2016 IHS Source: IHS © 2016 IHS Quarterly averages

21 US Economic Outlook / August 2016After a disappointing first half, US economic growth is picking up in the second half of 2016 Real GDP increased at a slow 1.2% annual rate in the second quarter, as 2.4% growth in final sales was offset by an inventory correction. Prolonged weakness in business fixed investment and labor productivity growth is holding back US economic progress. Real GDP is projected to increase 1.6% in 2016 (revised down from 1.9%) and 2.4% in 2017 and 2018 (unchanged). Consumer spending will drive the expansion, supported by growth in employment, real incomes, and household net worth. Housing construction will continue to recover in response to pent-up demand from young adults and improved credit availability. The Federal Reserve will be cautious in raising interest rates; the next increase is expected in December but could come in September.

23 US economic growth by sectorUS Economic Outlook / August 2016 US economic growth by sector Real GDP and its components Percent change 2015 2016 2017 2018 Real GDP 2.6 1.6 2.4 Consumption 3.2 2.7 2.3 Residential investment 11.7 5.9 7.4 5.4 Business fixed investment 2.1 -0.4 4.1 4.6 Federal government 0.0 0.8 0.9 -1.3 State and local government 2.9 1.5 Exports 0.1 -0.3 3.1 4.4 Imports 1.2 4.9 5.2

24 Canada’s energy sector is holding back growthUS Economic Outlook / August 2016 Canada’s energy sector is holding back growth Wildfires near Alberta’s oil sands fields temporarily disrupted production in the second quarter, causing a setback to real GDP. Fiscal stimulus will support near-term growth, but declining investment in resource industries will restrain it. The Bank of Canada should keep its policy rate at 0.50% through the summer of 2017 to support economic growth. The Canadian dollar and oil prices will gradually recover in 2017–20. Regional performances have diverged, with weakness in Alberta, Saskatchewan, and Newfoundland, but strength in British Columbia, Ontario, and Manitoba. Housing prices and construction are surging in Vancouver and Toronto, but declining in Calgary.

26 Canada outlook summaryUS Economic Outlook / August 2016 Canada outlook summary Real GDP growth (%) Consumer price inflation (%) Source: IHS © 2016 IHS Source: IHS © 2016 IHS Exchange rate per US dollar* Current-account balance** Source: IHS © 2016 IHS Source: IHS © 2016 IHS *Annual average, **Billions of US dollars

27 Canada’s economic growth by sectorUS Economic Outlook / August 2016 Canada’s economic growth by sector Real GDP and its components Percent change 2015 2016 2017 2018 Real GDP 1.1 1.2 2.4 Consumption 1.9 2.1 2.2 Residential investment 3.8 4.1 2.7 3.1 Business fixed investment -10.6 -9.3 -1.3 2.9 Government consumption 1.7 1.6 1.8 Exports 3.4 1.3 Imports 0.3 -1.4 1.4

28 Mexico’s economic outlookUS Economic Outlook / August 2016 Mexico’s economic outlook Mexico is linked to the US economy through trade, capital inflows, and remittances. Global automotive and petrochemical companies continue to invest in new capacity in Mexico. The opening of Mexico’s energy industry to private investment will eventually reverse the decline in oil production. The drop in oil revenues has led to deep cuts in public investment. The Bank of Mexico will raise interest rates in step with the US Federal Reserve to prevent capital outflows and peso depreciation. Security risks and corruption scandals are taking a toll on business sentiment, investment, and economic growth.

29 Mexico outlook summaryUS Economic Outlook / August 2016 Mexico outlook summary Real GDP growth (%) Consumer price inflation (%) Source: IHS © 2016 IHS Source: IHS © 2016 IHS Exchange rate per US dollar* Current-account balance** Source: IHS © 2016 IHS Source: IHS © 2016 IHS *Annual average, **Billions of US dollars

30 Economic performance varies across South AmericaUS Economic Outlook / August 2016 Economic performance varies across South America Brazil’s economy shows signs of stabilizing at a depressed level. Markets have welcomed the leadership changes. Chile, Peru, and Colombia will benefit from sound fiscal and monetary policies, trade alliances, and a rise in commodity export revenues. Argentina’s government has lifted currency controls, cut taxes, and successfully returned to the international bond market. Reducing inflation and fiscal deficits will be a more difficult challenges. Venezuela’s oil-dependent economy is in chaos, with huge deficits, hyperinflation, currency devaluation, and collapsing investment. The region’s long-term challenges include inadequate infrastructure, restrictive business environments, and income inequality.

32 Brazil’s recession is abating; recovery is not in sightUS Economic Outlook / August 2016 Brazil’s recession is abating; recovery is not in sight Brazil’s industrial production appears to be stabilizing at a depressed level, but a rebound is unlikely in the near term. The new government will face resistance to needed fiscal austerity. Low oil prices and corruption investigations are taking a heavy toll on Petrobras and the energy, construction, and financial sectors. To fight inflation, the central bank is holding its Selic rate at 14.25%. Consumer price inflation, while still high, is beginning to ease in response to weak demand and a recovery in the exchange rate. High and complex taxation, local-content regulations, administered prices, and infrastructure bottlenecks undermine competitiveness.

33 Brazil outlook summaryUS Economic Outlook / August 2016 Brazil outlook summary Real GDP growth (%) Consumer price inflation (%) Source: IHS © 2016 IHS Source: IHS © 2016 IHS Exchange rate per US dollar* Current-account balance** Source: IHS © 2016 IHS Source: IHS © 2016 IHS *Annual average, **Billions of US dollars

34 Brazil’s economic growth by sectorUS Economic Outlook / August 2016 Brazil’s economic growth by sector Real GDP and its components Percent change 2015 2016 2017 2018 Real GDP -3.9 -3.1 -0.1 1.7 Private consumption -4.0 -4.7 0.1 0.9 Fixed investment -14.1 -11.7 0.2 3.7 Government consumption -1.0 -3.2 -1.3 1.6 Exports 6.1 7.0 1.8 0.8 Imports -14.2 -15.2 1.4

35 Eurozone sentiment indexes are relatively stableUS Economic Outlook / August 2016 Eurozone sentiment indexes are relatively stable Positive replies minus negative replies Source: European Commission © 2016 IHS

36 Western Europe stays on a slow growth pathUS Economic Outlook / August 2016 Western Europe stays on a slow growth path Eurozone growth slowed in the second quarter, with a loss of momentum in consumer spending and business investment. Increased uncertainty will discourage capital spending, although some investment will be diverted from the United Kingdom to EU countries. Aggressive monetary stimulus, a weaker euro, and reduced fiscal headwinds will help sustain growth. With inflation picking up only gradually, the European Central Bank (ECB) is not expected to raise interest rates until 2019. The euro is projected to bottom out near USD1.04 in late 2016/early and then gradually recover to USD1.24 by the end of 2020. Ireland, Spain, and Sweden will maintain relatively healthy economic growth, but the United Kingdom, Italy, and France will struggle.

41 US Economic Outlook / August 2016With inflation below target, the European Central Bank will keep its policy rate near zero until 2019 Consumer price inflation and policy interest rate Source: IHS © 2016 IHS

42 US Economic Outlook / August 2016The United Kingdom’s outlook is clouded by the vote to exit the European Union Real GDP growth picked up to 0.6% in the spring quarter, as strength in consumer spending was offset by weakness in business investment. Our forecast assumes the United Kingdom invokes Article 50 in early , initiating two years of negotiations on future UK-EU relations. Uncertainty about the terms of Brexit is a major restraint on growth, leading to cutbacks in foreign and domestic investment. A mild recession is expected in late 2016 and early 2017. In early August, the Bank of England cut its policy rate from 0.50% to % and restarted quantitative easing. Fiscal policies remain tight. Sterling will likely sink further as Brexit triggers capital flight.

43 US Economic Outlook / August 2016Factors shaping the UK outlook after a vote to leave the European Union Success in concluding trade deals with the European Union and other countries/regions during the next two years Extent of access to the EU single market Effects on London as a financial center Deregulation initiatives in the United Kingdom UK immigration policy Would Scotland leave the United Kingdom? Capital inflows diminish, leading to sterling depreciation

45 UK outlook summary Real GDP growth (%, fiscal years)US Economic Outlook / August 2016 UK outlook summary Real GDP growth (%, fiscal years) Consumer price inflation (%) Source: IHS © 2016 IHS Source: IHS © 2016 IHS Exchange rate per US dollar* Current-account balance** Source: IHS © 2016 IHS Source: IHS © 2016 IHS *Annual average, **Billions of US dollars

46 UK economic growth by sectorUS Economic Outlook / August 2016 UK economic growth by sector Real GDP and its components Percent change 2015 2016 2017 2018 Real GDP 2.2 1.6 0.2 1.3 Private consumption 2.5 2.4 1.2 Fixed investment 3.3 -1.2 -6.2 -0.2 Government consumption 1.4 0.8 Exports 4.8 4.5 4.7 3.2 Imports 5.8 3.6 2.1 2.8 Industrial production 0.7 -0.5 1.7

47 Emerging Europe: Varying risks and growth prospectsUS Economic Outlook / August 2016 Emerging Europe: Varying risks and growth prospects Weak export markets in Western Europe will restrain growth in emerging Europe. The attempted coup in Turkey and the government’s response will hurt exchange-rate stability, capital inflows, and economic growth. Poland’s domestic demand will continue to expand, supported by an improving labor market, record-low interest rates, and fiscal stimulus. With their well-educated workforces and low risk profiles, the Czech Republic and Slovakia are attractive investment destinations. Low oil prices, economic sanctions, and capital flight have led to a severe recession in Russia, which should end in 2016. The easing of currency controls will improve Ukraine’s business climate, but fiscal consolidation, political instability, and emigration remain obstacles to growth.

49 Russia’s recession is beginning to subsideUS Economic Outlook / August 2016 Russia’s recession is beginning to subside The drop in oil prices, economic and financial sanctions, and capital flight have led to a deep, protracted recession. Real GDP fell 1.2% year on year in the first quarter. Recent monthly data show declines in retail trade and fixed investment moderating, while industrial production has edged up. The fallout from Brexit, however, will likely delay Russia’s recovery, since the European Union is its most important export market. The central bank reduced its policy rate from 11.00% to 10.50% in mid- June. As inflation moderates, further easing is expected. Unfavorable demographics, outmoded manufacturing capacity, and an overburdened infrastructure will limit long-term growth.

50 Russia outlook summaryUS Economic Outlook / August 2016 Russia outlook summary Real GDP growth (%) Consumer price inflation (%) Source: IHS © 2016 IHS Source: IHS © 2016 IHS Exchange rate per US dollar* Current-account balance** Source: IHS © 2016 IHS Source: IHS © 2016 IHS *Annual average, **Billions of US dollars

51 Japan’s economy travels a slow growth pathUS Economic Outlook / August 2016 Japan’s economy travels a slow growth path The yen’s recent appreciation will hurt exports (first price and later volume), corporate earnings, capital spending, and tourism. The Kumamoto earthquake in April disrupted production and tourism, limiting real GDP growth to a 0.2% annual rate in the second quarter. A new fiscal stimulus package and monetary policy easing will have modest effects on economic growth. Labor markets are tight, with the unemployment rate at 3.2%, but weak real wage gains are restraining consumer spending. A declining, aging population limits growth potential. High government debt may become a serious challenge.

52 Japan’s outlook summaryUS Economic Outlook / August 2016 Japan’s outlook summary Real GDP growth (%) Consumer price inflation (%) Source: IHS © 2016 IHS Source: IHS © 2016 IHS Exchange rate per US dollar* Current-account balance** Source: IHS © 2016 IHS Source: IHS © 2016 IHS *Annual average, **Billions of US dollars

53 Asia-Pacific will lead all regions in growthUS Economic Outlook / August 2016 Asia-Pacific will lead all regions in growth China’s fixed investment is decelerating as the economy rebalances toward consumer spending and services. India’s economy is growing and foreign investment is rising, although progress has been slow on Prime Minister Narendra Modi’s reforms. Indonesia’s growth is stabilizing in the 4–5% range; capital inflows are critical to financing the country’s significant infrastructure needs. New manufacturing hubs such as Vietnam are emerging in Southeast Asia and South Asia as China loses cost competitiveness. The information technology–business process outsourcing industry is set for continued rapid growth in India, Malaysia, and the Philippines. Japan, Malaysia, and Vietnam would be major beneficiaries if the Trans-Pacific Partnership is implemented.

56 China’s economic slowdown will continue in 2017US Economic Outlook / August 2016 China’s economic slowdown will continue in 2017 China’s slowdown is most evident in mining, heavy manufacturing, and utilities; services and light manufacturing are more resilient. Brexit’s effects will be limited, and China’s government will support economic growth with more fiscal and monetary stimuli. Home sales have picked up in 2016, although high inventories will continue to dampen construction activity. A determinedly weak renminbi policy is unlikely; concerns about mass capital flight outweigh potential gains in export cost competitiveness. Under China’s 13th Five-Year Plan, services will account for 70% of incremental growth in 2016–20, up from about 60% in 2011–15. Vast excess industrial capacity, financed by an explosion of debt, is the biggest threat to China’s growth prospects.

57 China outlook summary Real GDP growth (%) Consumer price inflation (%)US Economic Outlook / August 2016 China outlook summary Real GDP growth (%) Consumer price inflation (%) Source: IHS © 2016 IHS Source: IHS © 2016 IHS Exchange rate per US dollar* Current-account balance** Source: IHS © 2016 IHS Source: IHS © 2016 IHS *Annual average, **Billions of US dollars

59 US Economic Outlook / August 2016China’s lending flows remain elevated in 2016, leading to rapid debt accumulation Lending flows * 2016 forecast based on data through July Source: People’s Bank of China, IHS © 2016 IHS

61 China’s economic growth by sectorUS Economic Outlook / August 2016 China’s economic growth by sector Real GDP and its components Percent change 2015 2016 2017 2018 Real GDP 6.9 6.6 6.2 6.4 Private consumption 8.3 7.1 6.7 5.9 Fixed investment 5.3 4.0 4.5 5.2 Government consumption 6.1 7.0 Exports 2.4 3.2 5.5 6.0 Imports 2.8 0.5 3.9 4.7

62 China’s economic growth will downshift in the long runUS Economic Outlook / August 2016 China’s economic growth will downshift in the long run Real GDP and industrial production Source: IHS © 2016 IHS

63 India is outpacing China in economic growthUS Economic Outlook / August 2016 India is outpacing China in economic growth India’s robust growth is led by consumer spending and services. Foreign direct investment and government infrastructure projects are driving capital spending; local private investment remains weak. Brexit could mildly hurt India if global risk aversion leads to reduced foreign direct and portfolio investment. The Reserve Bank of India is expected to hold its policy rate at 6.50% to restrain inflation. Consumer prices rose 6.10% year on year in July. The goods and services tax (GST) is expected to take effect in late By reducing logistics costs and double taxation, the GST will improve manufacturing competitiveness and accelerate development of India’s e-commerce industry. Other policy reforms will move forward slowly. Much remains to be done to open markets, upgrade infrastructure, and raise productivity.

64 India outlook summary Real GDP growth (%, fiscal years)US Economic Outlook / August 2016 India outlook summary Real GDP growth (%, fiscal years) Consumer price inflation (%) Source: IHS © 2016 IHS Source: IHS © 2016 IHS Exchange rate per US dollar* Current-account balance** Source: IHS © 2016 IHS Source: IHS © 2016 IHS *Annual average, **Billions of US dollars

65 The Middle East and North Africa12/17/2017 3:07 AM US Economic Outlook / August 2016 The Middle East and North Africa The drop in oil prices, regional political instability, and war with the Islamic State are restraining economic growth. The region shifted from current-account surpluses to deficits in 2015; a return to surplus is expected in 2017 as oil prices recover. Lower oil prices are hurting Iran, Kuwait, Iraq, Saudi Arabia, the UAE, and Libya, but are helping Jordan, Lebanon, Morocco, and Tunisia. Whereas Saudi Arabia, Kuwait, and the UAE have substantial reserves, the finances of Iran, Libya, and Algeria are strained. The end of sanctions is raising Iran’s oil exports and economic growth. Egypt’s economy is expanding, but political and security risks remain. Addressing job growth, economic diversification, and competitiveness will be critical to regional stability in the long run.

67 Sub-Saharan Africa depends on commodity exportsUS Economic Outlook / August 2016 Sub-Saharan Africa depends on commodity exports Weak commodity prices and the slowdown in China are hurting export revenues, foreign investment, and economic growth. South Africa will struggle with large fiscal and current-account deficits and a challenging business environment. In Nigeria, terrorism by Boko Haram and attacks on oil facilities could threaten foreign direct investment and the economy. The naira has plummeted following the end of peg to the US dollar. Poor infrastructure (especially power generation), political instability, and corruption remain obstacles to economic development. In the long run, expanding domestic markets, growing middle-class populations, and regional integration will support economic growth. Several countries have strong growth prospects, including Kenya, Mozambique, Ethiopia, Liberia, Uganda, Ghana, and Tanzania.

69 US Economic Outlook / August 2016Summary Europe’s growth will be restrained by the UK vote to exit the European Union, leaving global economic growth below 3% through 2017. Emerging markets will rebound but will not regain the peak growth rates of the 2000s. The US economy is fundamentally strong; consumer spending and homebuilding will drive growth. The Asia-Pacific region will make the strongest contribution to global economic growth. Risks abound, including financial-market turbulence, China’s rising debt and excess capacity, conflicts in the Middle East and Africa, high Eurozone debt burdens, and stagnation in developed countries.

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World Economic Outlook

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