The surge in populism and anti-establishment sentiment witnessed in the Brexit vote and Donald Trump's victory in the US presidential election seem likely to push structural policies in the direction of economic nationalism, entailing a reduction in trade openness and international labour migration, says Fitch Ratings in its latest global economic outlook (GEO). At the same time, electoral expressions of discontent are pushing leaders in the advanced economies to embrace easier fiscal policies.
"In the long term, there is little doubt that increased trade protectionism and weaker migration flows would dampen growth in the advanced economies. However, in the short run, it is likely that the shift towards fiscal reflation will be the dominant factor," said Brian Coulton, Chief Economist at Fitch.
We have revised our global growth forecasts for 2017 upwards as the US is now expected to see a significant fiscal boost, albeit far smaller than that set out in President-elect Trump's campaign proposals. Fitch's US growth forecasts have been revised upwards modestly, by 0.2pp in 2017 and 0.1pp in 2018, to 2.2% and 2.3%, respectively.
"An important implication of the shift towards fiscal easing is that central banks are no longer alone in providing macro policy stimulus. While we have not changed our central view that the Fed will hike rates in December and follow up with two further hikes in 2017, this increases confidence that the normalisation of US monetary policy will progress at a faster pace than over the last year," added Coulton.
Global bond yields have increased sharply since the US election. With headline inflation rates set to rise across the board in early 2017 and the potential for a reversal of globalisation to push up prices in the advanced countries over the medium term, there has been a renewed focus on inflation risks. However, changes to the macro policy outlook are most pronounced in the US and with the ECB likely to announce an extension of asset purchases for six to nine months beyond March 2017, this has partly been reflected in renewed dollar strengthening.
In emerging markets, the macro picture has brightened during 2016 as recessions in Russia and Brazil have started to bottom out and commodity prices have recovered. Furthermore, China's efforts to stabilise the economy following the slowdown last year have been more successful than anticipated.
We have revised our China forecast for 2016 to 6.7% from 6.5% in September's GEO and 2017 up to 6.4% from 6.3%. Policy is now turning less accommodative in China, with a number of measures designed to cool the housing market, but the impact on GDP growth through 2017 is likely to be gradual.
Overall, against a backdrop of generally better-than-expected GDP growth outturns in 3Q16, our global growth forecasts have been revised up by 0.1pp in both 2016 and 2017. Global growth is expected to pick up to 2.9% in 2017 from 2.5% this year as US investment recovers, fiscal policy is eased and recessions come to an end in Brazil and Russia. The revision to global growth in 2017 is entirely explained by a 0.2pp upward revision in growth in the advanced economies. For emerging markets, the increase for China is more than offset by a weaker outlook for Mexico and India. Emerging market growth in 2017 has been revised down by 0.1pp to 4.8%.
This central scenario is accompanied by sizeable and increasing downside risks. First, the populist surge could exacerbate fragmentary tensions within the eurozone, with non-mainstream anti-EU parties gaining in popularity ahead of a series of key elections. Second, in the event of the US imposing punitive trade restrictions on China, retaliatory actions could see a trade or currency war develop. This would be highly damaging for global market sentiment and would reduce world growth.
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