December 2016

Forecast update: Growth and risks rise under Trump

  • We have upgraded global growth for the first time in nearly two years. Better near term activity plus a more favourable outlook for the US, UK and emerging markets are behind the move.
  • An expansionary fiscal policy plays a significant role in the US upgrade, but we are concerned about the inflationary implications of adding a boost to an economy with late cycle capacity constraints. It will be difficult for President-elect Trump to create 25 million jobs when there are only 8 million unemployed in the US.

European forecast update: Higher inflation to dampen growth

  • In our latest forecast update, we have revised up eurozone growth slightly for 2017, but still expect a slowdown as inflation is forecast to surge owing to energy inflation dynamics. This should dampen activity in 2017, but the outlook for 2018 is brighter. The ECB will face pressure to defend ongoing stimuli, but we expect it to resist calls to halt its support.
  • The UK continues to defy gloomy post-Brexit expectations, and is being revised up in our forecast for 2017. Like its continental neighbours, higher inflation is set to dampen growth, although it is compounded by the fall in sterling. The BoE is likely to remain on hold now given better growth, but the government has missed a great opportunity to boost public investment and long-term productivity growth.

Chimerican stimulus pushes EM onwards

  • Downgrades to three of the BRICs are offset overall by an upgrade to China. More broadly EM growth should also benefit from greater US stimulus, assuming we avoid an all-out trade war. In addition, despite the downgrades, we still see an upward growth path in Brazil, India and Russia over the next two years.

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Economic & Strategy Viewpoint - December 2016 22 pages | 710 kb