Global economy shows moderate recovery after slump in 2015 - Danske Bank

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  • The global economy is set to grow by 3.1 per cent this year as oil prices recover and China sees a cyclical lift, according to a new report published today by Danske Bank.

    In its latest Big Picture report, Danske Bank forecasts global growth of 3.1 per cent in 2016 and 3.5 per cent in 2017. Last year the global economy moved into a slump caused by a big decline in oil prices, which hurt US investment growth.  In addition, the economy has also felt the effects of a hard landing in the Chinese construction sector due to a big over supply of houses. Downward pressure on economic activity then spread to Emerging Markets outside China – particularly commodity exporters. However, both of these impediments to growth have faded in 2016.

    Commenting on the latest report, Danske Bank Chief Economist Angela McGowan said:

    “We have seen significant improvement in the wider economic climate since the turn of the year. This is a good thing because it is widely recognized that a global recovery is very important for a small, open economy like Northern Ireland.  However, as always, risks hover in the background. Brexit is currently the biggest risk to the economic outlook, but even if this particular risk fades in the second half of this year, uncertainty around the US presidential election may take over as a dark cloud on the global horizon.”

     

    United States

    The latest Danske Bank report notes that after a disappointing 2015, the US economy is back to cruising speed as the ‘oil shock’ eases and private consumption remains strong. Household spending in the US rose by around 4 per cent (annualized) in Quarter 2 suggesting that any weakness in Quarter 1 was temporary. Further support to economic growth will come from the weaker dollar, lower credit spreads and the recent stabilization in China. One major risk factor for the US is the UK’s EU referendum, as Europe risks falling into technical recession if a ‘Brexit’ materializes. The US is not immune to negative shocks from other economies and lower economic growth in Europe would hit the US too, as was the case during the European debt crisis back in 2012. A further political risk factor is the upcoming US presidential election in November.

    Ms McGowan said: “It now appears that the worse may be over for the US economy. Although growth was fairly subdued in the first quarter of this year, at Danske Bank we forecast a gradual recovery that will lift the US annual growth rate to 1.9 per cent this year. Our central forecast is based upon the assumption that political risks subside and oil investments stabilize as the price improves.”

     

    Europe

    The euro area economy continues to recover having now expanded for three years in a row.  Looking ahead, the Danske Bank report expects stronger support from investments although some loss of momentum is expected in private consumption due to the recent rise in the oil price. Investment in the euro area is expected to strengthen in the second half of this year for a number of reasons. Business sentiment should improve after the UK referendum (the bank’s central forecasts is based on the UK remaining in the EU). Secondly, external financing is more available in the euro area while the costs of borrowing are historically low. Thirdly, progress in the US and Chinese economies will support foreign demand in the euro area. And finally, euro investments have only recovered very modestly following the crisis, implying that the need to modernize the capital stock is currently very high.

    Inflation in the euro area is expected to pick up in the second half of this year, but the main driver is energy prices and this effect is set to fade in Quarter 2, 2017.  The latest Danske Bank report does not expect the European Central Bank to cut interest rates again after it stepped out of the currency war in March this year. However, to ensure inflation moves on to a more sustainable path, the ECB may well extend its Quantitative Easing programme by another six months.

    Commenting on the euro area, Ms McGowan added:

    “Danske Bank expects the euro area economy will grow by 1.6 per cent this year and 1.7 per cent next year. These forecasts are based on the UK remaining in the EU.  At 10.2 per cent the unemployment rate in the euro area remains on a clear downward trend – it has now reached its lowest level since 2011. At first glance this may seem high but it is in fact only 0.5 percentage points from the estimated structural level. When the structural level is reached we would expect to see wage growth in the euro area pick up.”

     

    China

    The latest Danske Bank report looks for a continued moderate recovery in Chinese economic activity over the coming quarters on the back of stronger housing markets and a gradual increase in export growth. This follows a significant decline in both Chinese industry and construction during 2015. While short term growth is improving, China is still facing medium-term growth challenges from a number of areas. For example, China has overcapacity in many sectors, there is also concern over Chinese debt levels and a difficult transition from investment-led growth to consumer-driven growth. Danske Bank look for GDP growth of 6.7 per cent in 2016 and 6.6 per cent in 2017 in line with China’s growth target.

    Ms McGowan noted:

    “Challenges around debt and over capacity are very real for China and the country is still only at around a third of the level of living standards in the western world. For China to climb the development ladder and catch up with the West it must continue with its current focus on technology, innovation and raising the education level.”

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