‘Keep risk in mind’ as global economies grow

17 October 2017

Buyers have been told to stay mindful of risks as indicators show the global economy is doing its best in the last 10 years.

Diego Iscaro, senior economist at IHS Global Insight, said global economies are improving, but cautioned that there were still risks coming from China, America and Europe among other places.

“I haven’t been able to say this for quite a long time, but the good news is the global economy is going quite well,” said Iscaro.

“We expect global GDP to grow at the fastest pace in 10 years and growth is being driven by developed economies. For the first time since 2007 we see all OECD economies growing in 2017. Not only are they growing but three quarters are growing at a faster pace to what we’ve seen.”

While forecasts suggest the recovery “has some legs”, Iscaro warned there was a higher risk of policymakers making bad decisions when things are going well. “So even though the economy is doing better, please keep the risks in mind.”

Speaking at the CIPS Annual Conference in London today, Iscaro said growth was being driven by extremely low global interest rates and accommodating monetary policy in developed economies. Global inflation remains low, “driving central bankers mad” around the world, but keeping consumer spending power strong. 

Better domestic demand in developed economies is helping developing economies that rely on trade and trade flows – which had been compressed over the last few years – are starting to recover. Some of the largest developing countries, including Russia and Brazil, are also gradually improving.

Iscaro talked about the outlook of three regions in particular: the US, Europe and China. 

While US GDP figures are always volatile, and will be affected by the recent hurricanes, the fundamentals look good, he said. Investment spending is high and unemployment low. Iscaro expects growth to continue. “Nothing spectacular but decent growth next year and the next as well.”

In Europe there is recovery, “not only in the usual suspects like Germany and the Netherlands, but also countries which have been suffering through the financial crisis. They’re growing.” Greece, Ireland and France have all improved, said Iscaro.

The European Central Bank has kept interest rates low and inundated the market with liquidity, and the fiscal position of most European countries has also improved, with policy becoming more supportive of growth.

But Iscaro warned a short-term positive outlook should not obscure long term challenges, which include extremely high debt and non-performing loans. The EU needs a “long period of recovery” to allow these fundamental problems to cool.

The improved picture in the Eurozone is also being “upset a bit by the situation in the UK”, said Iscaro. “You can literally construct 10 different forecasts depending on what your view on what Brexit negotiations will be.”

Over the short term China is doing quite well, as the government has introduced stimulus into the economy. But this is not sustainable over the long term, said Iscaro.

Debt is also a problem in China. Half of the extra global debt that will be generated over the next 10 years will be in China, and the country’s debt to GDP ratio increased 120% over the last 10 years. 

Most of this debt is corporate, but many of the corporates are state owned which means there is also a lot of public debt. This debt has to come down, said Iscaro, and the most likely scenario is that the Chinese government has the tools to manage the gradual deleveraging of the economy.

“The second scenario is not as uplifting,” he said. The economy could crash, perhaps triggered by a downturn in the housing market. This would not have such a strong impact on developed countries, but it would be felt.

Globally, Iscaro said central banks no longer have the tools to fight another global recession if it comes over the next couple of years. Interest rates are already extremely low and will need to come up quite significantly, he said.

The other risk comes from American president Donald Trump’s policies on trade. However Iscaro said so far there has been a lot of talk but not a lot of action, save for some anti-dumping tariffs which historically have not been exclusive to the Trump administration. 

“What we’re seeing is that the pragmatists seem to be winning the battle in the White House,” Iscaro said, but mid-term elections next year may affect the balance.

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