RaboResearch - Economic Research

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World order turned upside down: what is the impact on growth?

Economic Quarterly Report

  • We are once again expecting moderate global economic growth in 2017 and 2018 of around 3 per cent
  • We are assuming that the protectionist measures President Trump is expected to take will have a negative effect on the growth in world trade. Even if no concrete measures materialise, the threat of such measures could still have a negative impact
  • Political developments constitute the biggest source of uncertainty in our predictions. It is difficult to estimate the economic effects of Trump’s ‘America First’ policy, elections in key eurozone member states and the Brexit negotiations

Global economic growth will remain stuck at just over 3 per cent

We expect the growth rate for the global economy to remain at just above 3 per cent in 2017 and 2018 (figure 1). Accordingly, global economic growth expectedly remains fairly low in historical terms, despite an expected slight acceleration in both years.

In 2017, we are expecting growth to increase in the US in particular, while Russia and Brazil will fight their way out of a deep recession. At the same time, growth will weaken slightly in the eurozone, the UK, China and India (table 1). In 2018, economic growth again accelerates in the US and Brazil. We also expect to see higher growth in India, while we believe economic growth will slow down further in China.

Our forecast is subject to considerable uncertainty, mainly due to international political developments and expectations. The tensions in the Middle East and Russian assertiveness have been destabilising factors for some time now. However, in the first quarter of 2017 international attention has focused primarily on the political developments in the US and Europe.

Figure 1: Growth is picking up in the US, Russia and Latin America, but weakening in Europe and Asia
Figure 1: Growth is picking up in the US, Russia and Latin America, but weakening in Europe and AsiaSource: Rabobank, Macrobond, IMF, Nigem
Table 1: Outlook for world’s largest economies shows a mixed picture
Table 1: Outlook for world’s largest economies shows a mixed pictureSource: Rabobank, Macrobond, Nigem

Private expenditure in the US is driving global economic growth

We expect economic growth in the US to increase from 1.6 per cent in 2016 to 2.4 per cent in 2017 and 2.9 per cent in 2018. Household expenditure is expected to remain robust but the recovery in business investment in particular will cause growth to speed up this year. Rising confidence is also helping now that the Republicans are in charge in both the White House and Congress and they are promising tax cuts for American companies. We only expect to see the direct effects on economic growth of Trump’s plans to cut taxes and reduce the burden of regulation from the end of 2017. The positive effects from investments in infrastructure may take even longer to materialise.

However, we do already expect to see negative consequences in 2017 from American restrictions on trade, such as import tariffs or a border tax on imported goods, and possible retaliatory measures in the affected countries. Nevertheless, it is difficult to give a precise estimate of the effects of Trump’s trade policy. It is not yet clear what form the measures will ultimately take or how exactly international trading partners will respond. An additional uncertain factor is how the dollar will be affected by trade restrictions.

Brazil and Russia out of the doldrums

Brazil and Russia will clamber back up out of the malaise in 2017 after a number of tough years. The recovery will continue in 2018. In Brazil, economic reforms and higher prices for commodity exports are putting positive growth within reach this year, with further recovery expected in 2018. The reviving commodities market is also good news for Russia, in particular with regard to the prices for oil and metals. 

Inflation and (political) uncertainty are hampering economic growth in the eurozone and the UK

Economic growth in the eurozone will drop slightly to 1.6 per cent in 2017 and 2018, from 1.7 per cent in 2016. The eurozone is suffering primarily from a rise in inflation due to higher oil prices. On top of that, wage growth is only moderate as there is still slack in the labour market, especially in Southern Europe. At the same time, investment growth is still under pressure due to the increased uncertainty surrounding political developments in a number of eurozone member states, the future of the eurozone and the EU, Brexit and the impact of President Trump’s plans. In the UK, uncertainty about the Brexit negotiations and the substantial fall in the value of the pound are playing a major role. The uncertainty about the negotiations is mainly having a negative effect on business investments. We also expect consumer confidence to fall. That will lead to weaker growth in consumer expenditure, which was still a driving force behind economic growth in 2016. Another factor is the falling household purchasing power due to imported inflation caused by the substantial depreciation of the pound. At the same time, exports are still benefiting from the favourable exchange rate. All in all, we expect economic growth in the UK in 2017 and 2018 to come in at 1.7 and 1.8 per cent, respectively. 

Asia continues to be the global engine of growth, but growth is slowing down

In Asia, China is still in the midst of a transition in its economic model: the plan is for domestic consumption to be the engine of the economy, rather than investments in industry and property financed by credit. This will cause economic growth to weaken in due course. While an expansionary government policy has recently given the economy a major boost, we do not believe this upswing can be sustained for long. This is because there are still significant imbalances in the Chinese economy that will impede growth. Examples include the continuing rise in the debts of (state) enterprises and local authorities, a major housing market bubble and capital outflows. We expect official growth figures to fall steadily to 6.3 per cent in 2017 and 5.7 per cent in 2018.

In India, the government’s decision in November 2016 to remove frequently used high-value rupee notes from circulation will probably have a considerable negative impact on the economy. While the purpose of the measure was to remove black-market money from the economy, an unintended side effect is that it is hitting low-income groups particularly hard. Lower income groups in the retail sector and farming in particular settle their transactions in cash and often do not have a bank account. We have therefore amended the forecast growth rate for 2017 from 7.3 to 6.3 per cent. We still expect growth in India to bounce back in 2018. The government under Prime Minister Modi has introduced some important reforms, including a uniform nationwide VAT system. Meanwhile, economic growth in Japan continues to limp along at around 1 per cent, while the emerging Asian markets show a diverse picture. 

International political uncertainty is considerable

Trump is attacking sacred cows

International relations have been in turmoil since the inauguration of President Trump, with possible far-reaching and long-term implications. Much is still unclear but we can be sure that the new government will take the mantra ‘America First’ as its guiding principle. All American presidents are limited in the domestic policy choices they can make by the strong system of checks and balances in America’s institutions, in particular the power of Congress and the judiciary. But that does not apply to the same extent to the president’s freedom to make foreign policy. In that area, there is little stopping Trump and his team from attacking sacred cows. For example, the US is calling existing trade agreements into question. New trade barriers, including import tariffs, are explicitly on America’s political agenda. Furthermore, every time Trump makes verbal attacks on the currency policies of countries such as Germany, China and Japan, exchange rates fluctuate.

Figure 2: Increased expenditure on defence in exchange for Trump’s support?
Figure 2: Increased expenditure on defence in exchange for Trump’s support?Source: European Commission, SIPRI

It is not only the Trump government’s international economic policy that is causing uncertainty; its geopolitical policy is a source of uncertainty too. How stable will America’s support for NATO turn out to be? Will Trump really refuse to support European NATO countries if they fail to increase their defence expenditure fast enough (see figure 2)? Will America engage in a confrontation with China about Chinese aspirations in the South China Sea? What kind of policy will Trump pursue in the Middle East? The president seems to be aiming for bilateral agreements and ad hoc alliances that give the best deal for the US rather than building on the existing system of multilateral organisations and unions such as the UN, the WTO and NATO. That could destabilise the international order. The precise economic implications of Trump’s geopolitical policy are difficult to assess, but uncertainty is rarely a good recipe for a willingness to invest among businesses.

European leaders have hands tied due to impending elections

While the new US government is defining its position on the world stage, the EU’s leaders are fully occupied with their own national and European political agendas. In January, the British prime minister Theresa May made it clear that the UK wants to regain the freedom to control immigration. She does however want to keep extensive access to the internal market. Although the EU’s official negotiating position is still unknown, various politicians on the continent have already let it be known that the British will not get a deal with such favourable conditions. One reason for the EU to take such a hard line is the wish to discourage other countries from seeking to leave the Union. The negotiations on the conditions for the divorce and the new relationship will keep parties busy on both sides of the Channel for the time being and will determine the future of the British-European partnership. We already described the short-term effects above; the effects in the long term depend on the arrangements that the EU and the UK ultimately make with one another.

National elections in the Netherlands, France and Germany, and possibly Italy, mean that the incumbent governments have little opportunity this year to set out a new course at the European level. That is despite the urgent need for lasting solutions to deal with the threat of a Greek crisis, which has reared its head again, and the refugee crisis at Europe’s borders. Meanwhile, players in the financial markets are increasingly concerned about the unpredictable outcomes of the aforementioned elections, especially in the light of the revolutionary economic ideas of the French presidential candidate Marine Le Pen, such as the reintroduction of a national currency.

In the short term, we expect these uncertainties to have a negative impact on investment decisions in the eurozone. It is still difficult to assess the long-term impact of the elections. One thing is certain: Europe stands at a crossroads with regard to future cooperation. Indeed, in a recent study we looked at how the future could unfold for the EU. ‘Muddling through’ is not something that can be kept up indefinitely. Will politicians come clean and opt for ‘further integration’, will we simply look on ruefully until the eurozone and the European Union eventually ‘disintegrate’, or will we choose something in between, with a ‘two-speed’ Europe? Every scenario has political and economic costs and benefits, but these costs and benefits are far from the same for the four scenarios. Click here to read more about what the scenarios involve and the economic implications for Europe and the Netherlands.


We are once again expecting moderate global economic growth in 2017 and 2018 of just above 3 per cent per annum. In our forecasts, we are assuming that the protectionist measures President Trump is expected to take will have a negative effect on the growth in world trade. Even if no concrete measures materialise, the threat of such measures could still have a negative impact. Political developments in the US and the European Union constitute the biggest sources of uncertainty in our predictions.

Maartje Wijffelaars
RaboResearch Global Economics & Markets Rabobank KEO
+31 6 2257 0569
Ester Barendregt
RaboResearch Netherlands, Economics and Sustainability Rabobank KEO
+31 6 51828489

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