Positive growth despite year of turmoil

What’s next for the Global economy following a year of geopolitical turmoil?

15th December 2016

Continue to the other two articles of this addition of the Global Outlook....

Is the US market reaching a cyclical turning point?

US’s eight-year economic expansion is maturing. What are the growth prospects in the economy and real estate? Eileen Marrinan, Director of Research, North America, examines. Click here to read more.
 

Opportunities in Paris residential market

Paris is one of Europe's best performing residential real estate markets. What are the best long-term investment opportunities? David Rees, Senior Analyst, Continental Europe, offers some insights. Click here to read more. 

 

The year looks likely to end on a surprisingly positive note. Although forecasts have been progressively downgraded since the start of the year, most forecasters are now expecting a better end to the year compared with the dire predictions made in the immediate aftermath of the 23 June Brexit vote. IHS Global Insight expects global growth to average 2.3% in 2016, compared with an initial 2016 forecast of 2.6%, made at the beginning of the year.  

Markets are continuing to digest the surprise US election results. Although little is known about the specific policy initiatives of the new administration, government bond yields have increased noticeably over the past month in response to president-elect Donald Trump’s believed preference for renewed large-scale public infrastructure spending. These movements in US bonds have also been reflected in global bond markets, with the prospect of a US-led recovery in growth and inflation having a positive spill-over on the global economy.  

Despite the headline movement in bond yields it is notable that nominal bond yields have risen much more than inflation-adjusted yields since the US election. This divergence highlights that markets currently expect Trump policies to have a more pronounced effect on inflation than growth (Chart). This is largely because many of Trump’s notable policies, including restricting the flow of labour and trade, would restrict supply and push up prices. Though infrastructure spending would provide a welcome boost to short-term growth, it remains uncertain on whether the scale and scope of these initiatives is enough to offset long-term headwinds.

 

 

The US continued to be the leading light for the global economy. Q3 GDP growth was revised up to 3.2% annualised from an initial reading of 2.9%. The US’s medium-term growth prospects hinge on the Trump administration’s economic policies over the next four years.

Third quarter UK GDP growth was 2.3% y-o-y, higher than most immediate post-Brexit forecasts. Recent Office for Budget Responsibility forecasts noted that UK GDP growth will slow due to the Brexit vote, forecasting 1.4% annual growth in 2017 compared with an initial forecast of 2.2%, and Brexit is estimated to increase government debt by £58bn.  

The Eurozone ends the year on a muted note with the economy growing 1.6% in Q3. The European Central Bank has not signalled any intention to change course on their monetary stimulus programme. This is important as there are several national elections during 2017 where hard-right nationalist parties are expected to make a strong showing, potentially frightening investors.

The Chinese economy has remained relatively stable throughout 2016 and annual growth is expected to hit the government’s target of 6.7%. The scale of China’s credit market and risks around bad debts remain concerning. Destabilisation could spark a significant downturn in Chinese – and potentially global – asset markets.

 

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