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Sunday 28.05.2017 | Name days: Vilhelms, Vilis
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Expert: political turbulence creates risks of uncertainty for economy

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RU«Global low inflation environment is beginning to change, but slowly. Price pressure remains low because there is no stable labour pay growth. Deflation risk remains low as well because national economies of many countries are close to normal resource-usage level. Inflation expectations have increased as well,» BNN was told by SEB macroeconomics expert Dainis Gaspuitis.

He notes that the look at global economic developments has improved. Nevertheless, growing political turbulence risks raise questions about its future influence.

Gaspuitis notes that protectionism and isolationism will balance out the growth of optimism. It is clear, however, that this year will be predictably unpredictable.

«Good growth will continue in USA, but not because of Trump’s policy. Growing economies in the meanwhile has reached the lowest growth point. The EU and UK have entered a point of political and economic intersection. For the UK, this intersection is the Brexit process. The EU, on the other hand, faces a number of other challenges,» Gaspuitis comments.

The expert says that in spite of many internal and geopolitical complications, economic signals remain positive for the most part. GDP outlooks for the next two years have become somewhat more positive.

«GDP indexes of OECD countries will reach 2.1% in the next couple of years. Mood indexes, which have close synergy on a global level, are on the highest level since 2011,» Gaspuitis adds.

The economist notes that this partially reflects large hopes for fiscal stimuli and political change in energy and finance sectors. Positive tendencies are also noted in relation to the improvement of the perspective for growing economies, which comes from price rise of raw materials and more powerful capital cost cycle, Gaspuitis explains.

«In many fields (economics, trade, foreign policy and security) USA has begun reviewing their current policy. There is still a lack of information for possible changes and specific actions. This increases market insecurity. The goal of Trump’s policy is to strengthen USA’s corporate sector, which will be achieved through tax reform. To create an internal devaluation effect and enhance capital repatriation from abroad,» Gaspuitis says.

He notes that clean fiscal influence could be 0.2% from GDP this year and 0.3% next year, because USA’s economy is already close to full resource usage level. GDP growth in the next two years is predicted at 2.6%.

«Inflation-reducing forces remain, although tariff growth and other obstacles in the global trade system can still increase price pressure. In spite of cautious steps, many countries might gradually refuse non-traditional monetary policy. US monetary policy makers face many dilemmas. For example, the American fiscal policy risk may become pro-cyclic, which may increase inflation pressure,» explains the economist.

Gaspuitis predicts that the Federal Reserve System will increase interest rates twice this year and three times next year. He says it will help other central banks commence the conclusion of stimulating monetary policies. ‘Although the European Central Bank intends to keep the rate at 0.0% this year, it is likely the bank will gradually halt its securities procurement programmes.’

«Europe’s economy ignores the growing political uncertainty and demonstrates activation of employment and investments. Meanwhile, other countries increase their pressure on Germany to force it to realize a more expansive fiscal policy, so that it would help reduce risks of imbalance,» – explains Gaspuitis.

He notes that it is expected that the upcoming elections in Netherlands, France, Germany and maybe Italy will increase opposition against current governments. The largest risk is associated with the outcome of elections in France. Results could potentially shake up political and economic stability in Eurozone. Eurozone’s GDP growth will reach 1.8% this year and 1.9% next year.

The proportion of rapidly growing economies in the world is made up of nearly 60% of the world’s economy. «They are able to show good results in conditions of growing trade development risks, denominated debt burden in US dollar and in the process of resolving internal political challenges,» the economist told BNN.

He notes that overall GDP growth of this group of countries will speed up to 4.6% this year and 4.8% next year. «It will mainly consist of growth in China and India and economic recovery in Brazil. Upcoming political changes in the second half of the year will create the situation when Beijing will be more cautious in the realization of new reforms,» Gaspuitis reports.

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