Slower growth looks to be a new reality for the global economy
March 10, 2017
Since the Global Financial Crisis ended, economic growth has fallen short of historical averages and consistently disappointed policymakers. Deflationary shocks have continued to roil the markets, and much of the world's bond market offers negative yields. Some still think the world is headed for Japanese-style long-term stagnation. Yet the modest global recovery—at times frustratingly weak—has endured, proving the most ardent pessimists wrong.
Vanguard economists believe that the low-growth, low-interest-rate world is here to stay, driven by long-range forces—including globalization, changing demographics, and technology advances—that have shaped the global economy and tempered its growth for four decades. Importantly, we reject the persistent myth of economic stagnation and believe that the world is adjusting to the slower-growth environment.
What does this mean for key economies? Here is what Vanguard's 2017 outlook is projecting, based on results from the Vanguard Capital Markets Model® (VCMM).
The United States: Resiliency in the midst of global weakness
Despite the persistent slowdown in growth globally, the U.S. economy remains resilient. Even after it expanded for a seventh straight year—more than double the average length of an expansion—Vanguard economists expect it to stay on a long-term growth path of about 2% per year. Still, our researchers acknowledge that this abnormally long period of growth is not without risks, and they anticipate that U.S. markets will remain highly sensitive to unexpected shocks.
The policy direction of the new administration, along with the associated uncertainty, will prove significant over the long term. In particular, the rollout of new fiscal and trade policies has major implications for the global economic environment.
Changes in domestic policies, such as tax cuts and infrastructure spending, along with an unforeseen flare-up in inflationary pressures, could potentially trigger the acceleration of interest rate increases. And international influences—such as the breakdown of Brexit negotiations, or global spillovers from volatility in emerging markets—have the potential to disrupt expansion.
China: Balancing the risks of its rebalancing
On the back of 2016's aggressive infrastructure spending and extension of credit, growth in China has stabilized, led by a modest recovery of the "old economy," such as metals and real estate. Still, the country's slowing trend of recent years is unlikely to reverse any time soon, as industrial overcapacity, unfavorable demographics, and declining growth in productivity drag on its economy.
As a result, we expect China's real GDP growth to fall further in 2017. Although the official growth target is likely to hover around 6%–7%, our underlying proprietary indicators point to 5% "real feel" growth. Although we are cautiously optimistic about China's future in the long term, the outlook for its economy depends on many complex, deep-rooted factors—both domestic and external—that will become clearer with time.
Japan: Fighting looming policy limits
Nearly four years into its bid to reflate Japan's economy, "Abenomics" has reached a critical stage, as the overreliance on monetary policy has generated diminishing benefits and increasing risks.
Despite further asset purchases by the Bank of Japan and the introduction in 2016 of negative interest rates, the yen strengthened against the U.S. dollar early last year, economic growth remains sluggish, and deflation risk is on the rise again.
For 2017, we expect Japan's economy to grow at 0.7%, modestly above its long-term 0.4% trend, and inflation could recover gradually toward 1%. Any rebound is unlikely to be significant, however, given Japan's declining and aging population, labor market controversy, weak productivity growth, and high debt.
Europe: After Brexit
Britain's decision last June to leave the European Union will significantly affect the U.K. economy. A majority of economists estimate that living standards will suffer in the long run.
But considerable uncertainty remains about the terms of Britain's departure. A "soft" Brexit, with the country remaining a member of the EU single market, is likely to be less costly. A "hard" Brexit would be damaging, with immigration controls restricting the ability of U.K. firms to sell products and services into the EU. This more severe scenario would most likely lead to an eventual drop of 5% or more in Britain's GDP.
Brexit's immediate short-run effects are also negative, as the uncertainty may lead firms and households to delay spending plans. We expect continuing weakness in spending, with an overall effect of 2%–3% of GDP; that is at the lower end of expectations made before the vote.
The euro-area economy will be affected as well; we've marked down our 2017 growth forecast for it by about 0.2 percentage point, to 1.5%. The more important consequence would be if other countries decide to follow suit and break away from the EU. This year's general elections in France and Germany will shed light on that risk.
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