Introduction Global Economic Outlook, Q3 2016

Our team of global economists offer their views on the United Kingdom, Eurozone, United States, China, Japan, Brazil, Mexico, South Africa, India, and the economic implications of oil price fluctuations.

In the summer of 2016, suddenly, there are new uncertainties concerning the global economy, not the least of which is the British referendum in which a majority voted to exit the European Union. This raises questions about the short- and long-term outlooks for Britain, the future of the Eurozone, and the future of globalization and economic integration. Other current issues of concern include surprisingly weak job numbers in the United States in May, continued deflationary pressures in the Eurozone economy, and rising corporate debt in China. These issues are affecting the decisions of policymakers and, as a consequence, the outlook for the global economy. Other issues that had been top of mind only a few months ago seem to have disappeared from the headlines: oil prices, the Chinese currency, emerging-market debt, and the recession in Russia.

In this issue of the Global Economic Outlook, we begin with Ian Stewart’s assessment of the potential impact of the British referendum. Ian explains the various possible scenarios that might take place, noting that the uncertainty itself is likely to have a negative impact on the economy. He says that although Brexit will likely cause a slowdown in growth, he believes that the United Kingdom will be able to avoid a recession. Moreover, he points out that, aside from the impact of Brexit, the UK economy continues to retain many positive attributes that should serve it well. Finally, Ian looks at the potential impact of Brexit on the rest of Europe.

Next, Alexander Börsch looks at the Eurozone. He notes that economic growth has accelerated recently, with real GDP up 0.6 percent in the first quarter. Yet he worries that a British exit from the European Union could have a negative impact on the Eurozone countries, especially those with sizable trading relations with the United Kingdom such as Ireland, the Netherlands, and Belgium. Alexander also discusses the impact of Brexit on business sentiment, noting that a recent survey found that German business managers are worried that Brexit could lead to other country exits and a weakening of the European Union.

In our article on the US economy, Patricia Buckley says that, although she continues to believe the United States will have moderate growth in 2016, “downside risk has definitely increased.” While she is not spooked by the slow growth in the first quarter, Patricia is especially concerned that business investment has now declined for two consecutive quarters, the first time this has happened since 2009. She also notes that the drop in investment was accompanied by a slowdown in job growth. While she expects the economy to have rebounded in the second quarter and that the job slowdown might be temporary, she says that a further drop in investment could put longer-term growth at risk.

In my article on China’s economy, I discuss the latest data indicating that the economy continues to decelerate, led by weaker exports and weaker investment. I also examine the growing debate about the consequences of China’s big increase in private sector debt, especially corporate debt. I note the critique of China’s policy response posed by the International Monetary Fund and others, as well as the Chinese government’s reaction to its critics. I conclude that the debt situation poses a risk to future economic growth, especially if China doesn’t allow weak businesses to fail or restructure.

In his article on the Japanese economy, Akrur Barua offers an interesting view on the relationship between monetary policy and the large amount of debt issued by the central government. The central bank’s program of bond purchases means that the volume of debt held by the public will rapidly decline. The result could be that, with a reduced debt burden, the government can contemplate fewer tax increases and more spending. That, in turn, might help to boost inflation at a time of continued deflationary pressures.

Akrur Barua also wrote this quarter’s article on Brazil. Akrur says that, while the economy remained in recession in the first quarter, there are signs that the worst is over. Notably, exports have begun to respond to a weak currency. Moreover, Akrur discusses the current and potential impact of the new regime, which is considered to be focused on reforms. Markets have responded well, with increased equity prices, an appreciated currency, and lower bond yields. The new government has appointed a credible economics team and intends to consolidate fiscal policy, reform pensions and the tax code, privatize state-run companies, and boost private sector participation in infrastructure investment.

In our next article, Danny Bachman offers his thoughts on the Mexican economy. He notes that, despite implementing many favorable policies, growth remains low compared with other big emerging markets. On the other hand, Danny notes that a sensible monetary policy has lowered inflation. Plus, a flexible exchange rate has enabled the country to weather various storms. Danny is optimistic that the government’s reform agenda will ultimately pay off in terms of stronger growth.

South Africa faces considerable headwinds, according to our next article by Lester Gunnion. Real GDP fell in the first quarter. Moreover, as Lester points out, South Africa faces “subdued commodity prices, weak external demand, a strong dollar, and sluggish global trade. Furthermore, weak growth, political unrest, and deteriorating fundamentals have seen the rand slip and inflation climb.” The country’s government also just barely avoided a ratings downgrade. Lester concludes that the short-term outlook is “rather dim.”

In her article on India, Rumki Majumdar notes that India’s economic performance has been reasonably good, assisted by low commodity prices and better governance. Yet, she says, economic reforms, which are needed to boost the future rate of growth, have been slow in such areas as regulation, financial market rules, relations between the center and the states, and trade relationships.

In our last article, Rumki Majumdar looks at the global oil market. Specifically, she reviews the history of the last 50 years of oil price movements and provides thoughts on the factors that tend to drive prices. She then examines the current situation and concludes that, on balance, it is likely that oil prices will remain relatively low in a fairly narrow corridor. Finally, Rumki examines the likely winners and losers stemming from the likely path of oil prices.