Introduction Global Economic Outlook, Q2 2017

In this issue of the Global Economic Outlook, our far-flung economists examine the state of the world economy—specifically the United States, Eurozone, China, Japan, India, Canada, Brazil, Russia, Africa, and global inflation.

The second quarter of 2017 begins with considerable political risk in the world. Elections in Europe, conflict in the Middle East, tensions on the Korean peninsula, and uncertainty about trade policy in the United States have led to a high degree of financial market volatility. And yet the relatively benign state of the global economy suggests that there needn’t be too much worry. Growth has improved in the United States, Europe, Japan, and many emerging countries. China’s economy is no longer decelerating. In this issue of Global Economic Outlook, our far-flung economists examine the state of the world economy, looking at both economic and political issues and the manner in which they interact.

First, Patricia Buckley notes that, in the United States, a tight labor market is generating the biggest wage gains since the last recession. Yet she also notes that unless productivity growth picks up, wage gains will probably lead to an acceleration in inflation. Finally, she discusses the kinds of policies that might boost productivity growth, including infrastructure investment, tax reform, and deregulation.

Next, Alexander Börsch looks at the paradox of the Eurozone, where economic growth is accelerating but political risk remains high. He wonders how long the two can go hand in hand. He notes that rising risks have not been noticeable in the behavior of financial markets, which continue to dwell on better growth, rising employment, and the disappearance of deflation. On the other hand, political risks cannot be ignored. The main ones involve Brexit and the rise of populist parties in the Eurozone.

Third, I examine the Chinese economy, which is growing at a favorable pace and appears to be stabilizing after a period of deceleration. Yet the problem remains that too much of that growth stems from investments, many of which are not generating positive returns and pose a risk, given the rapid rise of debt. In addition, I look at China’s labor market competitiveness as well as shifting demographics, both of which will play a role in China’s future growth.

Fourth, I look at the Japanese economy, which appears to be doing better. Exports, in particular, are playing a role in reviving growth, especially given the suppressed value of the yen. Yet domestic demand continues to be weak. Moreover, Japanese business is worried that, having invested heavily in the United Kingdom as a gateway to Europe, Brexit now poses a sizable risk to that investment.

Next, Rumki Majumdar looks at the Indian economy, which is lately doing considerably better than anyone expected. Expectations were low due to the recent demonetization, which many analysts believed set the economy back—yet it is now growing at a breakneck pace. Rumki says that this reflects favorable monetary and fiscal policy responses to the monetary crisis. She also believes that the demonetization sets the stage for the digitization of the Indian economy.

Russia’s economy is the topic of Lester Gunnion’s article. Lester notes that Russia is doing much better than a year ago, largely due to external factors. Oil prices are up, not only boosting revenue but helping to stabilize the ruble. That, in turn, has allowed an easing of monetary policy. On the other hand, continued economic sanctions will stymie growth. Moreover, excessive dependence on exports of hydrocarbons poses a continued risk to the Russian economy.

In his article on Brazil, Akrur Barua says that Brazil has faced “a staggering reversal of fortune” after a period during which global observers expected much of the country’s economy. Yet the good news is that lower inflation has allowed the central bank to ease monetary policy. Moreover, the government appears determined to fix fiscal policy in a way that ought to boost growth. The result has been a drop in bond yields and a rise in the currency, both of which indicate growing confidence. On the other hand, the risk that the government will fail to enact reforms remains significant.

In his article on Canada, Daniel Bachman notes the improved performance of the economy but also focuses on the risk of a change in trade relations with the United States. Danny takes a deep dive into the issues surrounding the North American Free Trade Agreement. He shows how the trade deal has had a significant impact on the structure of the Canadian economy, and how any changes to it will put that structure at risk.

This quarter, we welcome Martyn Davies and Hannah Edinger of our African firm, who analyze the key economic issues facing Africa. They discuss how Africa’s improved performance in the past decade generated global interest, but they also note that performance has been diverse across countries. For now, Kenya is strong, South Africa is weak, and Nigeria is contracting. They discuss the role of commodities, privatization, diversification, and China in determining the continent’s current performance and future prospects.

Finally, Akrur Barua offers an article on inflation in both developed and emerging countries. He discusses how inflation is finally starting to rise in the developed world after a prolonged period of weakness. But he notes the rebound in oil prices and suggests that underlying inflation is likely to remain subdued. This suggests that monetary policy is not likely to offer many surprises. The US Federal Reserve is expected to engage in gradual tightening, while the central banks of the Eurozone and Japan are expected to remain focused on avoiding deflation. In emerging countries, the stabilization of currencies has allowed for lower inflation, thus enabling central banks to ease policy.