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State of the World in 2017
January 2, 2017, 4:13 pm
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The Arab Strategy Forum, which enables regional leaders in the private and public sectors to make strategically informed decisions, navigate risks and exploit opportunities, presented their ‘State of the World Report in 2017’ at their recent meeting in the United Arab Emirates.

Prepared by Eurasia Group, a world leader in political risk analysis and consulting, the report makes the following five predictions that could be of interest to investors, businesses, politicians and policy makers, and help them understand the risks and opportunities arising across the world and its global impact in the year ahead.

What will be the price of oil in 2017?

Brent will average under US$60 in 2017 (Likelihood: 85%; Impact on the global economy: 75%)

The production cuts announced by OPEC on 30 November will result in total OPEC production falling to around 33 million bpd. This will put a solid floor under prices, which will probably hover in the lower half of the $50s per barrel in 1H 2017, rising further in the second half but averaging under $60 for the year. US shale production will return to modest growth by mid-2017 under this scenario, while prices above $60 would bring on much stronger growth. This constraint will weigh particularly heavily on countries in the Middle East and North Africa that require higher oil prices to balance their budgets.

Global Impact: Insufficient revenue inflows will lead highly oil-dependent exporters to face a difficult trade-off between implementing politically-contentious spending cuts and delaying such cuts at the risk of further economic deterioration and greater political pain down the road.

Countries’ tolerance for such spending cuts will be determined in large part by their financial reserves and ability to raise capital (the greater these are, the less likely cuts will be), their political capacity to withstand discontent (the greater it is, the more likely cuts will be), and timing (cuts may, for example, have to wait until after electoral turning points, among other milestones).

Middle Eastern and North African oil exporters most likely to come under strain include Bahrain, Algeria, Oman, and Saudi Arabia according to IMF projections of 2017 fiscal break-even points. Exporters most likely to be affected outside the region include Venezuela and Nigeria.

What will be the general outlook for the global economy in 2017?

Global growth will remain below 4 percent due to a lack of structural reform in most of the world’s largest economies in 2017 (Likelihood: 85%; Impact on the global economy: 70%)

A variety of local drivers will lead reform to stall across most of the world’s major economies, thereby depressing both individual and aggregate growth prospects in 2017. A lack of reform in emerging markets in particular will prevent any significant growth surprise, while the generalized slump in structural reform will weigh on global debt levels — already at their highest point since 2000, at over 225 percent of global GDP according to the International Monetary Fund.

Global Impact: In a first category of countries, leaders will feel as though they have done their part in terms of reform efforts: In India, Narendra Modi will largely be resting on the laurels of having achieved goods and services reform, monetary policy reform, and foreign direct investment liberalization. In Japan, Shinzo Abe will avoid doubling down on Abenomic policies that have run into heavy criticism, particularly given his preference for pursuing a security agenda. In Mexico, Enrique Pena Nieto will have an eye towards the end of his mandate; having already achieved energy, telecoms, education, and tax reform.

A second category of countries will be in a holding pattern; waiting until after major domestic political turning points to pursue further reform. China will be focused on its fall leadership reshuffle, France and Germany on their 2017 polls, and Russia on its early 2018 presidential election.

Finally, difficult reforms will not even be on the table in a last category of countries that includes key markets such as the United Kingdom and Turkey. The former will be focused on minimizing the damage of its exit from the European Union, while the latter’s leadership will be loath to further pressure a private sector already hurting from the country’s recent coup attempt.

 

Will trade rebound in 2017?

Trade growth will not exceed 3 percent, remaining at or below expected global growth in 2017

(Likelihood: 80%; Impact on the global economy: 65%)

A combination of structural factors and continued political pressures will prevent global trade from rebounding in 2017. This will prove problematic for global growth given trade’s decades-long role in driving growth.

Global Impact: The populist backlash against new mega-regional trade deals will continue into 2017. In the United States, regardless of Trans-Pacific Partnership’s (TPP) fate, the mood will not be favorable to pursuing new trade agreements. In Europe, already-ailing negotiations over a potential Trans-Atlantic Trade and Investment Partnership (TTIP) will continue to be slow at best as France and Germany focus on domestic elections.

Meanwhile, it will take years for the United Kingdom to sort the nature of its new trading relationship with Europe and its partners further afield.

Constrained global trade growth will fail to jolt global growth, and will be particularly damaging to emerging markets that depend on increased trade to prolong and finalize their convergence with developed economies.

What will a Trump presidency mean for the US and global economies in 2017?

Inflation will grow above 2 percent in the US in 2017, thereby triggering a policy conundrum that may heighten the risk of domestic and global recession. (Likelihood: 40%; Impact on global economy: 70%)

A combination of protectionist policies, a weaker dollar, and expansionary fiscal policy will all put upward pressure on inflation in the United States, likely leading it to surpass its 2 percent target and thereby creating a dilemma for the Federal Reserve, the ramifications of which could weigh on the global economy in 2017. As inflation reaches undesirable levels over fears about president-elect Donald Trump’s populist economic inclinations, the Federal Reserve will face the difficult choice of either pursuing a hawkish position on interest rates and being blamed for stunting growth, or maintaining a dovish stance whose consequence may be an inflationary spiral that could even turn into a stagflationary episode if growth disappoints due to unrelated pressures. Such a scenario would in turn increase the risk of a domestic recession and associated international spill-overs.

Global Impact: The likely economic consequences of a Trump presidency within the US — including anti-trade measures (most likely countervailing duties on US imports from Mexico and China), a weaker dollar as a result of investor flight risk, and a greater push for fiscal expansion — will likely undermine the country’s economic recovery and lead to upward pressure on inflation, possibly up to 3 percent.

Part of the economic conundrum the US may find itself in will be owed to the risk of growing political pressures being put on Federal Reserve Chairwoman Janet Yellen, who already attracted criticism from Trump during the presidential campaign.

Failure to effectively address the joint risks of inflation and disappointing growth would increase the risk of a recession in the United States, which in turn could put the global economy at greater risk of a broader downturn.

How will Brexit play out in 2017?

Brexit will not be resolved, causing further uncertainty in global markets in 2017 (Likelihood: 90%; Impact: 75%)

While Brexit negotiations will likely start in early 2017, very little clarity will be achieved by the end of the year, and this will lead to even more market uncertainty. Prime Minister Theresa May will likely trigger article 50 of the Lisbon Treaty in Q1 of 2017, opening the way for negotiations between the United Kingdom and European Union about the future of the UK-EU relationship. These negotiations, however, will far outlast 2017, raising more questions than they answer in the coming year, and creating an overhang in the global economy.

Global Impact: It is quite likely that defining a new trading mechanism between the UK and EU will actually take more than the allotted two years. This will prolong market uncertainty and exacerbate Brexit’s impact on the global economy.

The United Kingdom’s goal will be to achieve as much preferential access to the EU single market as possible while giving in as few concessions as possible. The UK will be particularly loath to accept free movement of labor and European jurisdictional oversight, while potentially being slightly more accommodating on issues including contributions to the EU’s budget.

The impact of continued Brexit-related uncertainty for the UK’s, European, and global economies will be heightened by a lack of clear answers in 2017.

Will Europe be a source of economic instability in 2017?

Europe will be a source of economic and financial risk in 2017 (Likelihood: 60%; Impact on the global economy: 60%)

European fiscal and financial liabilities will create risks for both European and global growth and financial stability in 2017. European banks have experienced an over 10 percent decline in share price since the UK’s decision to exit the EU, according to the International Monetary Fund (IMF). Meanwhile, political leaders on the continent who are already combating crises on numerous fronts will be loath to spend their little remaining political capital to combat what are perceived as country-level banking problems. This, combined with poor fiscal outlooks in countries ranging from Greece to the broader Southern periphery and even France will create a risk of financial contagion.

Global Impact: A major European banking crisis would send shockwaves into global markets. But even barring a systemic banking crisis, the poor fiscal outlook of several European economies — including Italy, France, Portugal, and Greece — could send jitters through the global financial system, particularly as poor political capacity makes responding to even a limited crisis more difficult.

Any financial slump would only aggravate the existing trend toward a prolonged period of slower growth in Europe, by consequence weighing on the global economy. As European growth and financial risks undermine European investment into emerging markets while concurrently precipitating a financial flight to safety, emerging markets including Russia, Turkey, Brazil, South Africa, Mexico, the Philippines, and Indonesia may be at particularly high risk of exposure to Europe’s woes.

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