Brighter Outlook for Global Economy as Uncertainty Eases in the Wake of French and Dutch Elections

OTTAWA, July 31, 2017 /CNW/ - Following a tepid increase of 2.5 per cent in 2016, growth in the world economy will pick up this year, with real GDP forecast to rise by 2.9 per cent, according to The Conference Board of Canada's World Outlook: Summer 2017.

"The election of Donald Trump and the Brexit vote last year led to real concerns that the era of globalization and open borders was coming to an end. However, the defeat of far-right candidates in recent elections in France and the Netherlands has boosted confidence in the European Union and has eased some of the uncertainty in the global economy," said Kip Beckman, Principal Economist, The Conference Board of Canada. "Other positive developments for the world economy include five straight months of increases in global trade and low oil prices."

Highlights

• The world economy is expected to expand by 2.9 per cent in 2017.
• Defeated far-right candidates in elections in France and the Netherlands have boosted confidence in the European Union.
• The U.S. economy is expected to expand by 2.3 per cent this year.

With the European Union (EU) economy expanding in the 1.8 per cent range over the next two years, it has finally managed to escape the sub 1 per cent growth that took place following the end of the 2008-2009 recession. Improvements in labour markets, especially in Germany, combined with higher wage growth in countries like Spain will help increase household spending. Meanwhile, higher global demand combined with a relatively weak euro will boost export growth. Additional reforms to labour markets are required in countries like France, Italy, and Spain to boost overall growth in the EU to the 2.0 per cent mark. In the United Kingdom, uncertainty over the upcoming Brexit negotiations will affect business and household confidence and restrain economic growth, which is anticipated to reach just 1.6 per cent this year.

The U.S. economy is anticipated to grow by 2.3 per cent this year following less-than-stellar growth of 1.6 per cent in 2016. This year's solid growth can be attributed to healthy labour markets and an anticipated rebound in consumer and investment spending. The Trump administration is hopeful that cuts to corporate and personal taxes, higher spending on infrastructure and the elimination of many regulations should enable the economy to grow by at least 3.0 per cent. However, attaining sharply higher economic growth will be difficult as the aging population will restrain increases in the labour force and keep productivity growth weak.

President Trump's hostility to international trade and the upcoming North American Free Trade Agreement (NAFTA) renegotiation has already cast a dark shadow of uncertainty over the Mexican economy. Industrial production in Mexico has been declining since Trump's election and given the NAFTA negotiations are likely to be long and arduous, this situation is not likely to change any time soon. Higher tariffs on Mexican exports to the U.S. would have a devastating effect on the already struggling Mexican economy, which is slated for growth of just 1.5 per cent this year. In all, real GDP in Latin American is estimated to rise by 1.6 per cent this year as the region's two largest economies, Brazil and Argentina, emerge from recession.

In the Asia Pacific region, concerns about a trade war between the U.S. and China have subsided as President Trump's policy initiatives have, to date, not matched his election campaign rhetoric. China's economy is currently expanding at a pace very close to its potential, although the housing market has started to cool down due to government policy initiatives while growth in manufacturing output has levelled off. Expected growth of 6.6 per cent in China this year will help the Asia Pacific region expand by close to 5 per cent annually over the next two years. Meanwhile in Japan, economic growth is anticipated to rise to 1.4 this year from a 1.0 per cent gain in 2016. Higher growth will require the government to address labour shortages and the aging population as the unemployment rate in Japan is currently below 3.0 per cent.

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SOURCE Conference Board of Canada