Global Economic Outlook - April 2017

The world’s major economies have performed quite well in recent months despite the influence of political and policy upheaval. Brexit and the outcome of the U.S. election have yet to produce the negative outcomes some had feared.

But there may be challenging times ahead. The commitment to free trade in several markets remains in question, and any reduction in a trade alliance could diminish growth in all of the participating countries. Monetary policy, on balance, is becoming less accommodative. And asset prices in some markets are stretching their mooring to fundamental value.

Yet unless one of these risks becomes unmanageable, the global expansion seems poised to continue, and is even gaining steam in some places.

United States

The current U.S. economic expansion is already the third longest on record and could easily move further up the list. More importantly, it is in a sweet spot, with the U.S. Federal Reserve’s full employment and price stability mandates satisfied. Steady growth close to the potential level is predicted for this year. As discussed in a recent weekly commentary, we are not expecting much fiscal stimulus this year, and major change may not even occur in 2018.

Consumer spending is projected as the driver of growth after a lull in the January-February period. Business expenditures and residential investment outlays are expected to make modest positive contributions. Further strengthening of the labor market should move the jobless rate lower, while an acceleration of wages is most likely in the months ahead. Overall inflation crossed the Fed’s 2.0% target in February, but conditions do not suggest that prices will grow much faster than that.

The Fed raised the policy rate in March after taking a similar step at the end of last year. Assuming a calm geopolitical situation and no market turbulence in the wake of the upcoming French and German election outcomes, the Fed is on track to implement two more policy rate hikes in 2017. It is also weighing the option of shrinking its balance sheet later this year or early next year, which would be an important step in the effort to normalize monetary policy.


Purchasing Manager Indices across the continent have had a fairly spectacular run over recent months, highlighting the growing strength of the eurozone’s economic recovery. Businesses appear to be shrugging off political risk, as is evident by the positive economic data coming out of France.

Our base case remains that none of electoral tail risks will be realized in 2017, although Italy could surprise on the downside. Furthermore, we continue to expect the eurozone to benefit from relocation of businesses, especially in the financial services industry, from the United Kingdom to the continent. Overall, we expect real gross domestic product (GDP) to grow at 1.6% in 2017 and unemployment to fall marginally to 9.2%. Risks are tilted to the upside.