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If you feared 2016 would be bad, you could be wrong
Advanced and emerging economies contributed to an upturn in the world economy
December 20, 2016: In the second half of 2016, the world saw two unexpected events—Brexit and Donald Trump winning the US presidential election. Also, economists around the globe had predicted slower growth, but the situation is not as bad as feared.
Advanced and emerging economies contributed almost equally to the upturn in the world economy. According to a report by IFO Institute for Economic Research, a Munich-based think tank, Euro area’s continued recovery, Japan’s renewed postponement of fiscal consolidation, expansive economic policy measures of China, India and Indonesia helped the world tide over uncertainties.
Even oil prices have been largely stable around $45 per barrel after dipping under $30 in January. The agreement reached between OPEC nations and non-member countries has now pushed prices over $50.
The political situation, however, continues to remain uncertain. This may have far-reaching and highly uncertain consequences for the global economy in the year ahead. After a referendum in June 2016, Britain decided to leave the EU. The procedure for and conditions of Brexit will be negotiated by politicians starting in 2017.
The surprising election of Donald Trump as US president throws up a number of questions regarding the future political, fiscal and foreign trade policy orientation of the USA. Most recently, Italy rejected constitutional change in a referendum, which could have made the economically ailing country more capable of reform. For the moment, however, these events have not triggered the negative economic effects feared by many.
IFO Institute assumes that Brexit negotiations between Britain and the EU will take place without any major upheavals; and that there will be early signs of a ‘soft’ Brexit, that will involve no significant deterioration in the existing economic links between the EU and Britain. It also assumes that the US government will not make any notable changes to, or even terminate, free trade agreements that have already been signed or are about to be concluded; and that cross-border movement of goods and capital between the USA and the rest of the world will not be restricted. In the absence of concrete plans or decisions, it is assumed that the fiscal policy orientation of the USA will not change over the forecasting period.
Italy will probably retain the status quo of a country that is still in the process of sluggish reform. It is assumed that the precarious situation of the Italian banking sector will not lead to any major financial upheaval.
The pace of world economic expansion in the winter half year of 2016/2017 should slow down slightly compared to the third quarter of 2016. Although the Ifo World Economic Climate and the purchasing managers’ indices for the major advanced and emerging economies have improved recently, political events in many places have led to a surge in uncertainty, which will dampen overall economic growth over the forecasting period.
IFO Institute expects recovery in the Euro area to be modest, thanks to the large volume of impaired loans on the balance sheets of banks in Italy and Portugal. With oil prices no longer falling and a slight rally in the prices of other commodities, Brazil and Russia are expected to pull out of recession in 2017. India will also see strong growth over the forecasting period. In China, by contrast, the growth rate will continue to fall.
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