ESADE predicts that economic growth in developed countries will not exceed 2% on average in 2017

Most of the world’s developed economies will enter a slowdown while the emerging countries, especially India and China, will once again see significant growth. This is one of the main conclusions of the latest ESADE Economic Report, coordinated by Prof. David Vegara and prepared in collaboration with Banc Sabadell. The report predicts that the eurozone, with the exception of the United Kingdom and Spain, will grow by just under 2%, while the Japanese economy will have more difficulty recovering, with growth of just 0.5%. These figures are closely linked to the economic consequences of Brexit and the monetary policy of the Trump Administration, topics that receive dedicated chapters in the ESADE Economic Report. Other topics covered include the collaborative economy and the integration of the digital economy in the traditional economic system.

The report, written by members of the ESADE faculty, predicts higher growth in emerging countries than in developed countries. Developed economies will continue their trend of minimal growth (just under 2%, even in the United States), while the emerging economies will grow by more than 4.5% (especially India, at more than 7% growth, and China, at around 6.5%). Some economies that have had problems in recent years, particularly Brazil and Russia, will improve their situation somewhat.

Results in Latin America will continue to be mixed. Some economies that export raw materials – including Peru, Bolivia and Colombia – will see growth of between 3% and 4%, while Chile and Mexico will grow by less than 3%. Developments will be worse in other economies: Brazil will come out of its recession but will probably grow only by a few tenths of a percentage point, while Venezuela and Ecuador will remain in recession. Latin America generally – and Mexico in particular – is an area that is quite exposed to the Trump Administration’s possible protectionist policies.

Inflation: from theory to practice

In keeping with the slight rebound in activity in the advanced economies and the recovery of oil and commodity prices, the inflation rate began in 2016 to rebound and in 2017 will be very close to 2%, the target figure for central banks. This will probably be the case for the United States and Canada, as well as some of the advanced Asian economies, such as South Korea and Australia. Some emerging economies, such as Brazil, Russia and Turkey, have inflation rates that exceed the targets of their central banks. These countries will see their inflation rates decrease slightly in 2017 as the effect of the recent devaluations wears off and monetary policies begin to bear fruit.

The United Kingdom will be the only European country to exceed the target inflation rate, “thanks in part to the devaluation of the pound sterling”, according to the study. The eurozone, however, will continue its downward trend after reaching an inflation rate of around 2% in 2015. All eurozone countries will see their inflation rate drop slightly below 1.5%, except for some peripheral economies such as Spain, Ireland and Greece, where the rate will slightly exceed 2%, and developing economies of the area, where rate will also exceed 2% or 3%. The European Central Bank should maintain its unconventional liquidity-injection measures.

United States and United Kingdom: in the crosshairs

According to the authors of ESADE Economic Report, the American economy will likely experience a short-term acceleration due to tax cuts, tax incentives for infrastructure construction and increased military spending, which will have a positive impact on the global economy thanks to the appreciation of the dollar and an increase in demand. However, this effect will soon be diluted by the gradual rise in interest rates as a result of a growing public deficit and a shift towards protectionism in the Federal Reserve’s monetary policy. Other measures advanced by Trump – including the imposition of tariffs, total or partial withdrawal of the United States from the North American Free Trade Agreement (NAFTA) and an aggressive attitude in international trade conflicts – may be counterproductive in the medium and long term.

The United States will not be the only country to adopt an expansionary fiscal policy in 2017. The United Kingdom is also expected to introduce some form of stimulus to counteract the slowdown resulting from the uncertainty surrounding Brexit. Other countries such as China and Japan, as well as emerging countries like India and South Africa, have also announced new measures. The report argues: “Developed countries should adopt fiscal policies intended to support demand in the short term and increase the potential for growth, which was badly damaged after the crisis. They should also focus on protecting certain vulnerable groups in order to counter the recession’s effects on inequality.” Other objectives that are important for fiscal policy, in the opinion of experts from ESADE, include increased investment in R&D, the construction of infrastructure, and investment in education and health. However, in the United States doubts regarding the viability of the strategy could cancel out much of its expansive nature if consumers and businesses decide to save more in anticipation of future tax hikes.  The Trump Administration will need to clarify its fiscal strategy as soon as possible.

As for the eurozone, the ESADE Economic Report anticipates a neutral fiscal policy during the 2017-2018 period and a public debt ratio that will gradually shrink to an average of 87% of GDP (down from 90.3% in 2015). This reduction will be possible thanks to lower interest rates, the presence of primary surpluses in some economies and reductions in public deficits. Some economies, however, remain deeply in debt, which limits their leeway in fiscal policy.