The world in 2017: Growing, but slowly
27 February 2017 | Markets and Economy
Vanguard's chief economists for Europe and the Americas discuss global economic conditions. Slow growth, they say, is better than no growth at all.
For an in-depth look at Vanguard's global outlook for 2017 and beyond – including our forecast for the United Kingdom and Europe – read our full report, Stabilisation, not stagnation.
Gemma Wright-Casparius (senior portfolio manager, Vanguard Fixed Income Group): Roger, what is Vanguard's global economic outlook for 2017 and beyond?
Roger Aliaga-Díaz, PhD (Vanguard chief economist, Americas): Our theme for 2017 and beyond, thinking more medium to long-term, is one of subdued growth, especially compared [to] the type of growth that developed markets experienced before the financial crisis. So we're talking about a view that is not as pessimistic as many have in terms of a Japan-style scenario. But it's not that optimistic either, as we have seen some reaction in the markets after the US elections. So it is more in the middle, stable growth.
And the reason for that stable growth is that the long-term drivers of growth are not necessarily policy-related – with so much policy debates we hear about. They are more forces such as demographics, such as technology. In spite of all the technological breakthroughs we're seeing every day, but those have not translated yet into faster productivity growth. So, with that in mind, that's where we think the growth may remain – subdued going forward for the global markets.
Gemma Wright-Casparius: Andrew, what would you expect for US growth and perhaps for emerging markets going forward?
Andrew Patterson, CFA (Vanguard senior investment strategist): Sure. So in the United States, we've seen quite a few estimates hovering around 3% [annual GDP growth], maybe even north of 3% in some cases. We don't necessarily share that degree of optimism. We peg trend growth for the US somewhere around 2%. And while we don't have a lot of clarity around policies of the incoming administration, we believe there could be some benefits there. You could see some tax reform at some point in 2017 and possibly 2018, some infrastructure spending, which would be a boost to growth.
At the same time, protectionist policies, the anti-immigration sentiment, that could actually be a detractor. So as those things work themselves out, we peg growth in the US in 2017 somewhere around 2.5%. A lot of these policies – I mentioned anti-immigration, the de-globalisation, so anti-free trade policies – those are going to have impacts globally, not the least of which on emerging markets. Emerging markets are going to be impacted, in some cases negatively, by this policy uncertainty, by the evolution of these policies, by interest rates, by a strengthening [US] dollar. And I think in addition to that, maybe even more so is the impact of China. So how is China going to progress in their transition to a developed market model for growth?
Gone are the days of 8%, 9%, 10%, 11% growth in China being driven primarily by investment and exports. That's being replaced with a more developed market model type of growth where it depends more on consumption. So as they transition to that, they're going to continue to slow. And just how well are emerging markets going to be able to deal with that? That's going to go a long way towards dictating how they perform in 2017 and beyond.
Gemma Wright-Casparius: Peter, where would our expectations be for Europe, particularly with the Brexit negotiations underway?
Peter Westaway, PhD (Vanguard chief economist, Europe): I think growth in Europe is continuing to be rather subdued, in particular in the UK. We think the impact of the Brexit vote is going to mean that growth will slow down over the next couple of years. We haven't seen much of a slowdown yet. That surprised most of us, but I think eventually it will come so we're probably going to have growth around 1.5%, maybe even less than that.
As for the euro area, that will be impacted a little bit by a slowdown in the UK. But, more generally, Europe is gradually working its way back to full capacity, helped by monetary stimulus from the ECB [European Central Bank]. But we're still only looking at growth of around 1.5%, which is not really very spectacular at all when you consider the fact that the euro area is still below or I think it's just reached the level the GDP was at, at the time of the financial crisis. So really, pretty poor performance.
Gemma Wright-Casparius: So still really not much change at all in our long-term trend. Maybe a little bit of room for optimism, but, generally, still well within our expectations for 2016 that we had on the medium-term growth.
Roger Aliaga-Díaz (Vanguard chief economist, Americas): Yeah, absolutely. If anything, we may not see the forecast, or the expectations, being revised downwards once again. In each and every year over the last four or five years, we have seen all the projections for growth being disappointing and being revised down. This may be the year in which we are at the stable level. That's where we really come from with our stable view on growth. It's a modest, but potentially achievable level.
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