Economist: developments in the world are becoming more intense

In spite of complications that appeared in the political environment in the world, global growth will become stronger in the next two years. It will be slowed by factors like unequal welfare growth and heavy debt burden, predicts SEB Bank macro-economic expert Dainis Gaspuitis.

«Looking back at events of recent months, we have to conclude the general view on global economy has not changed. Mood indexes have recovered, but financial markets have reacted unexpectedly positively to Donald Trump’s victory. Economic growth of OECD member states will be 1.7% this year and 2% in 2017 and 2018. Considering that many central banks are maintaining historically low interest rates and continuing quantitative softening policy, the growth rate is viewed as moderate,» – said the economist.

According to him, the political environment has changed since Brexit and presidential elections in USA. Dissatisfaction with the ruling circles in Europe has increased, which can change the political environment and composition of political power in next year’s elections. Even now it can be assumed that isolationism tendencies will become stronger. Fiscal stimulation measures may play a more important role in economic policy. They are likely to improve growth potential. Large and growing uncertainty about global trade and security policy could pave way for unexpected scenarios that will have negative economic consequences in a long-term perspective.

It is likely that Trump’s economic policy will lead to the realization of a more expansive fiscal policy in USA, which could be equal to 0.5-1 % of GDP, which may result in tax discounts for households and enterprises, as well as investments in infrastructure. The impact will be much lower in scale than what Trump promised in his pre-election campaign. Many things will depend on ambitions of the Presidential Administration and ability to gain support in the Senate. USA’s GDP will grow by 1.6% in 2016, 2.3% in 2017 and 2.2% in 2018. Growth is delayed by weak production output growth and investments, as well as the demographic situation, which slows down consumption development.

«Elections will be in the centre of attention in Europe. It is expected that populism will grow in support in 2017 elections in Netherlands, France in Germany, possibly even Italy after December’s constitutional referendum. Governments and ruling political parties will be forced to realize a more expansive fiscal policy. This includes increasing defence expenditures. Ruling political parties will be forced to find new strategies and alliances to impede the formation of new populist parties. In spite of the complicated situation, Eurozone’s economy will grow 1.8% in 2016 and 1.6% in 2017 and 2018. Brexit process remains unclear. Up until now UK’s economy has been flexible. Nevertheless, it is expected to become slower in the future. This year, economy will grow 2%. In 2017, on the other hand, GDP growth is expected to be 1.4%. Economic growth will be 1.7% in 2018,» – Gaspuitis says.

«Rapid economic growth perspectives will improve only slightly, because Russia and Brazil are gradually rising from recession. China’s controlled growth rate is gradually becoming slower. Russia’s and Brazil’s GDP are gradually becoming more stable. In 2017, both economies will likely return to positive growth. India still has the most rapid growth among BRICS countries. China will continue securing good annual growth of 6-6.5%. Nevertheless, debt burden, unstable housing market and overproduction in industry will keep Beijing from accomplishing its economic ambitions,» – said the economist.

According to Gaspuitis, many of Trump’s planned political elements coincide with what many economists and international organizations have been calling for some time now. New fiscal initiatives and structural policy can increase demand and USA’s potential growth. It can help relieve pressure on the central bank, as efficiency of the monetary policy is becoming weaker, but its flaws are becoming clearer. Shifting focus on fiscal and structural policy will not help avoid problems.

«Economic trends in Baltics, though stagnating, are aimed forward. Household consumption remains the most important driving force, but challenges with competitiveness limit growth potential. Estonia’s GDP is expected to grow only by 1.3% this year (2.2% in 2017 and 2.8% in 2018). Latvia’s current growth rate is unfavourable, but more active use of EU funds and private consumption will help speed up GDP growth from 1.6% this year to 3.5% in the next couple of years. Lithuania’s GDP growth is expected to be 2.5% this year and 3% in 2018. The country’s economic growth is delayed by low investment level in the public sector,» – explained Gaspuitis.

«Sweden’s economic perspectives are good. This year’s GDP growth is 3.7% (+2.8% in 2017 and +2.3% in 2018). The main GDP driving engines is public consumption (refugee resettlement) and capital costs (housing deficit). In spite of powerful employment growth, good wage growth and positive wealth effect, the savings level is record-large – 16% of current income. Households, it seems, are sceptical about the future, because there is uncertainty about the international environment and Sweden’s political situation,» – said Gaspuitis.

Comment