Our report outlines some of the worse scenarios in 2016, and what we can expect in 2017-18, in global political economics.
The world faced multiple economic challenges in 2016. The International Monetary Fund (IMF) projections for 2015 and 2016 estimated a drop in global economic growth.
Even if the world economy “could be doing much worse”, the speculations of a better economy did not really suffice, because of low oil prices and weak European and Japanese currencies. 2016 ushered in an era of a slower Chinese economy, falling commodity prices and somewhat predictably, a rate hike by the Fed. A silver lining, however, came through, following the Paris climate summit, a $20 billion investment in clean-energy research and development, giving hope for technologies that could take a quantum leap into a new, improvised generation.
In 2016, weak productivity returned in the United States; constrained job growth coupled with a steady GDP, was sort of the result of an already mature economy. But, low productivity translated into lower living standards. And politically, the US incurred a period of perilous economic populism. On the other side of it, economies in the Latin America witnessed a downturn in the same year. Poor economic policies prior to 2016 saw Latin America’s economy contracting by 0.7%. This was brought about by lower capital flight and commodity prices following the completion of the commodity super cycle. Spill-over effects could be witnessed in the group of economies as currency markets became more and more volatile in Brazil, Argentina and Venezuela. Latin America suffered a significantly poor growth rate after the 2007-08 global financial crisis, till 2016. This may have been a period when commodity prices were normalized, but this was also the time when Brazil witnessed the deepest and longest economic recession; the recession was influenced by political crisis marked by corruption that adversely affected confidence and paralyzed policymaking. Venezuela’s economic contraction in 2016 was deepened by the shortage of intermediate and consumer goods and free fall in oil production. Also, diffuse currency and price controls stimulated inflation, which deteriorated social well-being further.
The European economy was challenged by the risk of debt crises. Political challenges in the form of growing populism and the rising animosity between the Left and Right added to the already unstable latitude. This constrained policymakers, creating economic-policy uncertainty also in the region. The Greek economy was pushed off the cliff as Greece’s Syriza government adhered to an advice to left-lean to the U.S economists. Additionally, the Greek government squandered hundreds of dollars and precious time to survive Eurozone membership. More drag was provided by the lack of structural reforms, an aging population, and Europe’s attempts to absorb increasing number of asylum seekers. Another enduring time that the EU still faces is the Brexit and its ongoing aftermath. The departure of U.K most definitely created aridity in the form of uncertainty and left businesses with a lack of confidence to invest, thus laying off more people than anticipated. Subsequently, private consumption was hit severely, collapsing the economy. A weaker housing market and adverse export sector led China to suffer a slow economic growth rate in 2016; another spill over.
The sudden drop in commodity prices on a larger scale, left many economies grappling with deteriorating terms of trade, huge capital outflows, and significant reduction in fiscal revenues. Consequently, economies having flexible exchange-rate policy relied on exchange rates as defence, as their domestic currencies slid substantially against the US dollar. As a result, most economies turned to forceful policy measures, including governments restricting public spending, while central banks enforced policies to appreciate their currencies. Business and consumer confidence is still on hold, as a result.
IMF projects that the global economic growth will pick pace after such lacklustre outturn. It is anticipated that both emerging markets and developing economies will witness a significant growth rate in the years 2017 and 2018. Nevertheless, there are uncertainties tied to the projection following an unpredictable U.S administration under the new Presidency. Advanced economies are projected at 1.9% growth rate in 2017 following potential changes in the US’s policy stance under Trump’s administration. Inflations and commodity prices are anticipated to remain below target levels. Financial market development will continue rising substantially, both in long-term real and nominal interest rates. Capital flows and exchange rates are likely to appreciate due to increased strength of the U.S dollar and currencies of advanced commodity exporters such as Japan, Mexico, and Turkey (IMF, 2017).