Global economy shows positive signs of development while entering 2017

In 2015 and most of this year, the global economy was on a weak and diverging path. The U.S. faced challenges from the declining oil price, whereas Europe has been caught in the mud due to political uncertainty and EM turmoil in the first quarter. Since the start of 2016, the Chinese economy recovered as housing rebounded and infrastructure investment received a stimulus to fend off a hard landing because of capital outflows, noted Danske Bank in a research report.

But as 2017 draws near all regions are indicating positive developments. The U.S. has ended the one-and-a-half year slowdown related to a noticeable decline in energy investments. Private consumption in the country is expanding at a sound rate, while housing appears to be strong. There are also indications that growth in investment is beginning to bottom from the negative rates witnessed in the past year.

While Donald Trump is expected to provide a stimulus to fiscal policy, most of this effect is likely to be felt in 2018, according to Danske bank. This is expected to help sustain the U.S. recovery for a few years, barring any new shocks. The U.S. GDP is expected to expand 2.8 percent in 2018.

Meanwhile, the impacts of Brexit in Europe were far less than anticipated and both the euro area and the U.K. have witnessed a recovery in the third quarter growth indicators. It is possibly been assisted by stronger Chinese activity. However, Europe is expected to face new challenges soon, with certain significant elections coming up in France and Italy.

On the other hand, China has recovered throughout 2016 and still not indicating any signs of a peak in the current data. But certain leading indicators for construction and infrastructure, which are the two important growth engines for 2016, are indicating towards a decelerating growth in 2017.

“We look for a peak in Q1 but do not expect a hard landing, rather a moderate slowdown – partly because housing inventories have fallen quite significantly and partly because exports should serve as a buffer given a 10% weakening of the CNY and recovering export markets in the US and Europe”, added Danske Bank.

Structurally, China’s economy seems to be more fragile as financial risks keep increasing because of a very rapid rise in corporate debt, rising leverage in financial markets, rapid growth in shadow banking and evident signs of misallocation of credit. China is likely to face certain sort of financial crisis in a span of three to five years. As growth decelerates in 2017, attention might turn back to structural challenges and risks of China and a rebound in capital outflows might be in the pipeline next year.