«In parallel to reduction of growth predictions, certain risk factors have lost their strength since the beginning of the year. For example, oil prices and the stock market have recovered since the previous decline. Central banks have either become more stimulating or have put off the normalization of their policy,» – comments SEB Bank macroeconomic expert Dainis Gaspuitis.
According to him, concerns about China have reduced slightly as well. Nevertheless, global economic growth will remain anaemic and weak. GDP growth in 35 OECD member states will likely reach 1.9%, which is lower in comparison with last year (2.1%). GDP growth may reach 2.3% in 2017. Downward pointing risks dominate the near future perspective even though they have somewhat reduced. Political risks in USA (presidential elections) and the European Union (Brexit and Greek debt), as well as elections in Spain, France and Germany, China’s economic situation, global debt level, as well as limited economic policy manoeuvring options are factors that create serious concerns in the long-term perspective.
«Lengthy stagnation, which provides for slow growth, low interest rates and inflation, is becoming more expressed. The leaning towards savings and investments is becoming more expressed in the world, which puts pressure on actual interest rates. The interest rate situation is more likely to adapt to the situation, rather than create it. The role of fiscal policy will likely grow, because the potential of monetary policy tools continues to deplete and the effect continues to become weaker. The question is whether or not political leaders will be able to take the initiative. Market economy’s dependence on political decisions has increased over the years of lasting financial and economic deregulation. The influence of central banks on loan accessibility has sharply increased, which means clear risks for ineffective division of resources. The established monetary policy has only contributed to the increase of inequality. The negative interest rate policy is taking on a political dimension because it is being interpreted as a secret welfare tax. Borders between central banks and politics have become more conditional, which raises the question about the independence of central banks,» – explains Gaspuitis.
Japan, Germany, the United Kingdom and Sweden to some extent are countries whose restrictions on the labour market have not been beneficial for wage rise lately. Politicians and central banks of many countries have announced that it would best to secure a more rapid increase of wages. Minimum wage rise in USA and the UK, for example, is a sign of loss of trust in the market’s ability to create balance. Looking ahead, it should be said that there are still signs that the US labour market could soon begin increasing wages more actively. Inflation is expected to remain low because of the growing competition between globalization and digitization processes and forming surplus of production output. The price of Brent crude oil could rise to USD 45-50 within the next two years, which will help reduce deflation risks. Inflation has not gone anywhere. It remains hard for central banks to reach their inflation goals. In spite of concerns about the effectiveness of the monetary policy, multiple central banks will continue their stimulating programmes. Due to the expressed low inflation in Eurozone and Japan, the European Central Bank maintains the possibility of expanding asset procurement volumes. Japan’s Central Bank retains the possibility of reducing its main interest rate from the current -0.10% to -0.30%, the expert says.
«The slowdown of China’s growth remains within the acceptable range, allowing the country to avoid a rough landing. Beijing’s use of fiscal and monetary policy softens production output and housing surplus, as well as the negative influence of state and private companies’ debt level. China’s domestic economy has a good potential of becoming the main economic engine in the future. GDP growth is expected to reach 6.5% in 2016 and 6.3% in 2017. Economic development in other BRIC countries will be varied. Although India will grow by 7.5%, Russia and Brazil will remain in recession due to structural problems, low oil price and political problems. Decline of USA’s economic growth does not reflect any fundamental difficulties. Households can expect further improvements of the economic situation related to the labour market, income and welfare. In addition to slightly higher oil prices, the situation will stabilize somewhat in industry. Economic growth will recover in the second half of the year. With that, USA’s growth will reach only 1.9% in 2016 and 2.5% in 2017,» – adds the economist.
«Eurozone’s economic accomplishment has been relatively stable as of late. In 2016, Eurozone’s economy returned to the GDP level that was noted before the Lehman Brothers collapse in 2008. Eurozone has the potential to grow above its potential, which is 1%. As a result, Eurozone’s GDP will grow 1.7% in 2016 and 1.8% in 2017. But Eurozone is a monetary union with imbalanced growth and major problems of political nature. Germany is facing growing criticisms from the International Monetary Fund, USA and even other Eurozone member states for its surplus of EUR 290 billion (8% of GDP) and too cautious economic policy. The banking sector, especially in South Europe, is pressured with excessive debt level, unsafe loans and low interest rates. All this delays growth. Populism is on a rise in multiple countries, which only increases tension,» – said Gaspuitis.
Estonia’s, Latvia’s and Lithuania’s perspectives are good. Nevertheless, risks remain. Private consumption is an important factor for economic growth. It only benefits from a powerful labour market. The expected wage rise will provide higher purchasing power to households. Unfortunately, wage rise also threatens competitiveness. Inflation will remain low. Finances of the public sector remain balanced, which provides governments a degree of freedom for situations of economic decline. GDP growth in Latvia is expected to be 2.7% in 2016 and 3.5% in 2017. Lithuania and Estonia are expected to grow 2.8% and 2% this year and 3.2% and 2.4% the next, according to the bank’s expert.