The Economist Intelligence Unit PDF

Country Forecast
Global outlook
Key changes since November 14th
• The Economist Intelligence Unit's forecasts for the global economy are
largely unchanged from last month. In the US, the president-elect, Donald
Trump, has begun assembling a cabinet that looks consistent with his
campaign pledges, but there is still a high degree of uncertainty about what
measures Congress would approve.
• Financial markets are buying into the story that a fiscal expansion will help
to reflate the US economy. This has given added impetus to an upward
trend in global bond yields that began in mid-2016. We believe that bond
yields reached the bottom in mid-2016 but expect them to remain low by
historical standards. Monetary policy in Europe and Japan will remain
extremely accommodative throughout the forecast period.
• We have cut our 2016-17 growth forecast for India to reflect the
government's withdrawal of high-denomination notes from circulation,
which is leading to a cash crunch and disruptions in supply. We still expect
India to grow strongly over the medium term. We have cut our 2017 growth
forecast for Brazil to 0.5% (1%) in the light of poor recent data.
• The combination of rising US bond yields and dollar strength has led to
capital outflows from emerging markets. This is reviving concerns about the
ability of borrowers, particularly highly leveraged corporates, to service
dollar-denominated debts.
• We have kept our China growth forecast unchanged but have made some
downward revisions to the renminbi exchange rate. Capital outflows from
China have picked up since mid-year and intensified in November, leading
the authorities to tighten restrictions on outflows.
• We expected OPEC to reach a production deal in late November and have
therefore not made large revisions to our oil price forecasts. Output curbs
will accelerate the rebalancing of the market in the first half of 2017, but we
are sceptical about them having much effect beyond that. Copper and iron
prices have surged in the past month on hopes of increased demand. We
view this as overexuberance and do not expect the price of industrial and
agricultural commodities to break away from recent lows in 2017-21.
January 2017
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Global outlook 1
Contents
2 World growth and inflation
9 Regional summaries
29 Exchange rates
32 World trade
34 Commodity prices
38 Global assumptions
Country Forecast January 2017 www.eiu.com © The Economist Intelligence Unit Limited 2017
2 Global outlook
World growth and inflation

(Forecast closing date: December 8th 2016)
World summary
(% change)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Real GDP growth (PPP exchange rates)
World 3.3 3.3 3.4 3.2 2.9 3.3 3.2 2.9 3.5 3.5
OECD 1.3 1.3 1.9 2.2 1.7 1.8 1.8 1.4 1.8 1.8
Non-OECD 5.2 5.1 4.7 4.0 3.9 4.5 4.2 4.1 4.7 4.8
Real GDP growth (market exchange rates)
World 2.3 2.2 2.6 2.6 2.2 2.5 2.4 2.0 2.5 2.6
OECD 1.2 1.2 1.9 2.1 1.6 1.8 1.7 1.3 1.7 1.7
Non-OECD 5.1 4.9 4.4 3.6 3.5 4.2 3.9 3.8 4.5 4.4
North America 2.2 1.7 2.4 2.5 1.5 2.3 2.1 1.1 2.0 2.0
Europe 0.1 0.6 1.6 1.8 1.7 1.4 1.6 1.6 1.8 1.6
Euro area -0.8 -0.2 1.2 2.0 1.7 1.4 1.5 1.4 1.5 1.4
Asia & Australasia 4.5 4.4 4.0 4.0 4.0 3.9 3.3 3.2 3.6 3.7
Latin America 3.0 2.8 1.1 0.1 -0.7 1.4 2.1 2.0 2.8 3.0
Middle East & North Africa 3.8 2.0 2.4 2.3 2.2 2.7 3.5 3.0 3.7 3.8
Sub-Saharan Africa 4.2 4.7 4.5 2.9 1.1 2.6 3.5 2.9 3.0 3.6
Inflation (av)
World 4.0 3.8 3.6 3.2 3.8 4.1 3.8 3.0 3.1 3.0
OECD 2.2 1.6 1.6 0.5 0.9 1.8 2.0 1.6 1.8 1.9
Non-OECD 6.2 6.7 6.1 6.7 7.5 7.1 6.1 4.8 4.6 4.5
Trade in goods
World 3.5 3.9 4.2 2.6 1.7 2.8 2.7 2.0 2.9 3.0
OECD 2.0 2.5 4.1 4.3 2.1 2.7 2.4 1.7 2.6 2.5
Non-OECD 4.6 5.2 3.5 -0.4 1.0 2.9 2.7 2.6 3.5 3.6
Source: The Economist Intelligence Unit.
Donald Trump's election has led to In the month since Donald Trump was elected as the US's next president,
tighter financial conditions financial markets have responded vigorously. The US dollar has appreciated
against a host of emerging-market currencies, notably the Mexican peso, the
Turkish lira and the Brazilian Real. This was not surprising; markets were
factoring in a win for his opponent, Hillary Clinton, and so the dollar's gains
against emerging-market currencies were easily interpreted as investors seeking
safer ground in response to a perceived rise in political risk. However, the dollar
has also appreciated against the euro and the yen, which are competing safe-
haven currencies. This suggests that the dollar's jump is a bullish reaction to
Mr Trump's expected economic policy.
On the campaign trail, Mr Trump pledged to stimulate the economy through
higher infrastructure spending and lower tax burdens. The likelihood of both
measures materialising rose when the Republican Party maintained its
majorities in both chambers of Congress (the legislature). Markets jumped on
these policies and now expect faster economic growth, higher inflation and
higher interest rates from the Federal Reserve (Fed, the central bank). This has
lent support to the dollar, and bond yields have risen sharply. The US ten-year
bond yield rose from 1.83% on November 7th to 2.45% on December 1st. This
was its highest level since June 2015.
Editors: Joseph Lake, John Bowler; Mike Jakeman, Sebastien Marlier, Robert Powell, John Ferguson (consulting editors)
Closing date: December 8th 2016 All queries: Tel: (44.20) 7576 8000 E-mail: london@eiu.com Next report: To request a schedule, e-mail schedule@eiu.com
Global outlook 3
Global: yield differential between 10-year US Treasury bonds and 10-year bunds;
euro:US$ exchange rate
Yield differential between 10-year USTs and bunds euro:US$ exchange rate;
(percentage points); left scale right scale
2.3 1.200
2.2 1.175
2.1 1.150
2.0 1.125
1.9 1.100
1.8 1.075
1.7 1.050
1.6 1.025
1.5 1.000
Sep Oct Nov Dec
Source: Bundesbank; US Treasury.
Bond yields in the US and elsewhere bottomed-out in mid-2016 and have been
rising since, possibly marking the end of a three-decade bull market. Thus, the
rise in yields since Mr Trump's election represents the continuation of a trend.
Even so, The Economist Intelligence Unit believes that markets have run ahead
of themselves in the past month, pricing in a reflation of the economy that may
not materialise, given the uncertainty about the direction of policy under the
incoming administration. We believe that US tax rates will be cut, but there is a
serious risk that Mr Trump will fail to receive Congressional support for higher
public spending on infrastructure or that his plan consists of tax breaks for
private contractors rather than higher fiscal spending, resulting in a lower level
of stimulus. The tightening of financial conditions in the US has important
consequences. Capital is flowing out of emerging markets again. This will make
it more difficult to attract funds for investment, depressing economic growth
and reviving fears of an emerging-market debt crisis. Meanwhile, the stronger
dollar will put further pressure on beleagured US exporters. It is worth noting
that yields remain exceptionally low in historic terms—the taper tantrum of
2013 saw a bigger jump—but Mr Trump's election now feels like a step change.
The US political outlook has changed Mr Trump represents an earthquake for the US political outlook. On the one
dramatically hand, the country's layers of government are now more closely aligned. The
White House, Congress and the Supreme Court will all have a right-wing bent,
which should make the passage of legislation more straightforward. On the
other hand, Mr Trump's appointments to his cabinet (which are the best
indication so far of his likely policy agenda) suggest that he will devote much
attenton to dismantling the policies of his predecessor, Barack Obama. Areas
susceptable to a sudden change in direction include immigration, climate
change and healthcare.
On foreign policy, he will govern according to his "America First" stance. This is
a rejection of the notion that the US has a responsibility to cement and uphold
its values around the world. Instead, the Trump administration will reduce its
international commitments, creating a space for other countries, like China, to
step into. This will be evident even in areas where there is already a high level
of risk, such as in the South China Sea and Syria. Japan and South Korea will
have to shout louder for attention; Russia, Turkey and Egypt may find the US
more co-operative. We consider that political risk in the global economy has
4 Global outlook
risen significantly with Mr Trump's election. His decision to speak on the

telephone with Tsai Ing-wen, the president of Taiwan, shows that he is not
afraid of riling China and upsetting the current world order. There had been no
correspondence between the two heads of state since diplomatic relations were
severed in 1979.
Where will populism strike next? The UK's decision to leave the EU and Mr Trump's election in the US provide
clear warning signs for political leaders in 2017 and beyond. On December 4th
voters in Italy offered up another, by rejecting the flagship constitutional reform
promoted by the prime minister, Matteo Renzi, who immediately tendered his
resignation. All three instances saw voters rebel against an establishment that
they perceived to be pursuing the wrong course. All were in large part the
culmination of a long-term decline of popular trust in government institutions
and political parties. They also signify unhappiness with stagnant incomes.
Above all, they demonstrate that society's marginalised and forgotten voters are
demanding a voice—and if the mainstream parties will not provide it, they will
look elsewhere.
The seismic nature of the Brexit and Trump victories, and Mr Renzi's defeat,
should not be underestimated. If anything, these breakthroughs will embolden
the populist challenge to the mainstream parties, particularly across Europe.
Ruling elites across Europe are facing the prospect of a gathering revolt and,
thus far, they have shown little inkling of how to respond. Important popular
votes take place in the Netherlands, France and Germany in the next
12 months. In each of these contests anti-establishment movements and parties
will be challenging mainstream political forces, albeit to differing degrees. The
results will have national importance, but they will also have a significant
influence on the political debate in the EU and the wider region.
Chinese growth will lurch down in 2018, The health of the Chinese economy remains the biggest risk to the global
resulting in widespread volatility economy. In 2016 it continued to defy gravity, with official data showing
growth slowing smoothly, despite persistent inefficiencies in the state sector
and recessionary conditions in the industrial north-east. We think that a hard
landing is on the cards, and forecast that growth will lurch down from 6.2% in
2017 to 4.2% in 2018. This kind of shift is unprecendented in modern China and
will come at a time when the global economy is uniquely unprepared to react.
Consequently, 2018 will be a year of anxiety around the world, characterised
by volatility in real economies and financial markets.
Since the 2008-09 global financial crisis China has become increasingly reliant
on credit to sustain its rapid expansion. We expect the slowdown in 2018 to be
induced by a change in government policy following a reshuffle of the senior
leadership in 2017. The president, Xi Jinping, will have the support to slow
credit growth. This will require higher interest rates that suppress household
spending and business investment. Firms in the construction and real-estate
sectors will be hit hardest.
The ripple effects will be felt around the world. Worst-hit will be those
countries that depend on exporting commodities to China, such as Australia,
Chile and Mongolia. Next will be countries that have deep and broad trading
relationships with China, such as South Korea and Taiwan. The rest of the
world will feel a chill through declines in equity prices and in consumer and
business confidence.
Global outlook 5
A slowdown in growth to 4.2% is a relatively benign outcome, given China's

extreme level of indebtedness. Other economies whose paths China is tracking,
such as Japan in the 1980s and Spain in the 2000s, were brought to their knees
by systemic crises. We do not foresee this for China, partly because state
involvement in the banking sector will ensure that no major lenders will go
under. Moreover, the slowdown will be policy induced, so it will be managed
rather than disorderly. The credit bubble will deflate rather than burst. However,
the balance of risk is still tilted to the downside, and it is possible that the
government may not be able to exert the level of control over the economy that
it would like. With the economy entering uncharted waters, a range of
responses are plausible.
Slow monetary tightening in the US will For most emerging markets, 2016 was a more straightforward year than seemed
give emerging markets breathing space likely, owing to a lack of US monetary tightening and a stalling of the dollar
rally. This eased concerns about the risk of an emerging-market debt crisis and
enabled many emerging-market central banks to cut interest rates, boosting
disposable income and economic growth. However, the market response to
Mr Trump's election has been a sting in the tail, as it has led to renewed dollar
appreciation and capital flight from emerging markets. The comfort for
emerging markets is that there is no guarantee that Mr Trump will succeed in
passing stimulatory policies in the US or that they would work. The path of Fed
tightening is likely to remain gradual, and we expect central banks in Europe,
Japan and elsewhere in the developed world to maintain extremely
accommodative monetary policies.
Nonetheless, there are two other main risks on the horizon for emerging
markets. First, China's growth may slow by more than we currently expect,
resulting in weaker economic demand and a lack of investor appetite for
emerging-market assets. Second, Mr Trump could live up to his campaign
promises and implement more protectionist measures than we currently
expect, which could trigger a global trade war.
Taken together, the outlook for developed economies and emerging markets
means that we expect global economic growth to accelerate from 2.2% in 2016
to 2.5% in 2017. This will be the high-water mark for the global economy.
Because of the lurch downwards in China, growth will slow to 2.4% in 2018,
and in 2019 we expect that the US economy will be hit by the first recession in
a decade, pulling global growth down to 2%. The first years of the next decade
look less threatening, with growth averaging 2.6% a year.
Risk scenarios
Events may diverge from The Economist Intelligence Unit's forecast in ways that affect global business operations. The main
risks are represented by the following scenarios.
Very high risk = greater than 40% probability that the scenario will occur over the next two years; high = 31-40%; moderate = 21-30%;
low = 11-20%; very low = 0-10%.
Very high impact = change to global annual GDP compared with the baseline forecast of 2% or more (increase in GDP for positive
scenarios, decrease for negative scenarios); high = 1-1.9%; moderate = 0.5-0.9%; low = 0.2-0.5%; very low = 0-0.1%.
Risk intensity is a product of probability and impact, on a 25-point scale.
6 Global outlook
Negative scenario—China suffers a disorderly and prolonged economic slump

High risk; Very high impact; Risk intensity = 20
We expect China to experience a sharp economic slowdown in 2018, with growth slowing to 4.2%, from 6.2% in the
previous year. The political reshuffle at the Chinese Communist Party Congress scheduled for late 2017 will enable the
president, Xi Jinping, to alter economic policy in 2018. The primary focus of this policy shift will be to slow the rapid
growth in credit that has been a feature of government policy since the global recession in 2008-09 and has caused the
country’s debt stock to surge to over 200% of GDP. Despite the scale of the economic slowdown, we anticipate that it will
be policy-induced and therefore easier for the authorities to manage (reflecting in part the state's deep integration with
China's banking system). As a consequence, we do not expect it to result in a rise in unemployment and social unrest on a
scale that would threaten the established order. However, there are substantial risks to this outlook. The bursting of credit
bubbles elsewhere has usually been associated with sharper decelerations in economic growth, and, if accompanied by a
house-price slump, the government may struggle to maintain control of the economy. If the Chinese government is unable
to prevent a disorderly downward economic spiral, it would lead to lower global commodity prices, particularly in metals.
This would have a detrimental effect on Latin American, Middle Eastern and Sub-Saharan African economies that had
benefited from the earlier Chinese-driven boom in commodity prices. In addition, given the growing dependence of
Western manufacturers and retailers on demand in China and other emerging markets, a prolonged deceleration in Chinese
growth would have a severe global impact—far more than would have been the case in earlier decades.
Negative scenario—One or more countries withdraw from the euro zone

Moderate risk; Very high impact; Risk intensity = 15
The resignation of the Italian prime minister, Matteo Renzi—who in December saw his efforts to overhaul the constitution
defeated in a referendum—has once again refocused concerns on the health of the euro zone’s third-biggest economy and its
fragile banks. Although a solution to Italy’s banking crisis is available, there is a risk that either option—namely, a bail-in for
bondholders (many of whom are Italian citizens), or a capital injection via the European Stability Mechanism—could
prompt a public backlash. In the latter instance in particular, the probability of accompanying (and unpopular) EU-imposed
economic conditions could garner support for eurosceptic parties, several of which, including the Northern League and Five
Star Movement, are well placed to benefit if the country goes to the polls. Indeed, Five Star has explicitly called for a refer-
endum on Italy remaining in the euro zone. Elsewhere, although its situation is less chronic than in previous years, Greece’s
position in the euro zone is still not guaranteed. Germany’s finance minister, Wolfgang Schäuble, said in early December
that Greece’s future in the euro zone depended on the implementation of more fiscal spending cuts. Taken together, the
economic difficulties across southern Europe have shown the fundamental difficulties posed by a single currency zone
without a concurrent fiscal union. The risk is rising that the euro could become a scapegoat for populist politicians. If one or
more countries did leave the euro zone, this would destabilise the global economy. Countries leaving the zone under duress
would suffer large currency devaluations and be unable to service euro-denominated debts. In turn, banks would suffer
huge losses on their sovereign bond portfolios and the global economy could be plunged into recession.
Negative scenario—Beset by external and internal pressures, the EU begins to fracture

Moderate risk; Very high impact; Risk intensity = 15
The UK's decision in June to become the first country (excluding Greenland) to leave the EU has raised concerns about the
future viability of the EU. Although the UK has long had an ambivalent attitude towards Europe, the hostility of the UK
Independence Party towards the EU is mirrored by other European “insurgent” parties, such as the Freedom Party in the
Netherlands and Front national (FN) in France. With this in mind, there is a risk that the establishment parties in the EU will
consider offering a referendum in order to siphon off support from populist parties. Among others, Marine Le Pen, the FN
leader, has made such a referendum a key plank of her party’s manifesto. Although the UK’s fate may deter other European
leaders from employing a similar tactic, in reality the arguments pushed by the Brexit campaigners—focused on immigration
and loss of sovereignty—chime with much of Europe. The failure of the EU to agree a united response to the refugee crisis,
which led to the reintroduction of migration barriers across Europe, and the deep resentment in some Mediterranean
countries towards the austerity measures imposed by the EU have contributed to the rise of nationalist sentiment among
the region's politicians. With no cogent roadmap in place for the future of the "European project", there is a growing risk of
an existential crisis in the EU that could culminate in its eventual fracturing. In the event that the EU were to begin to
Global outlook 7
fracture and land borders were reimposed, trade flows and economic co-operation would be hindered, weighing on growth
in the world’s largest single trading bloc. More widely, the area’s slew of international trade deals would need to be
renegotiated as the bloc began to disintegrate, and the probable fracturing of the euro zone would translate into enormous
currency volatility globally.
Negative scenario—Currency depreciation and higher US interest rates lead to an emerging-market corporate
debt crisis
Moderate risk; High impact; Risk intensity = 12
The bond market rout that followed the election of Donald Trump in the US presidential election, coupled with the
renewed strengthening of the US dollar and our expectation of a Chinese hard landing in 2018, has increased the risk of
large outflows of capital from emerging markets to safer investments. The countries most vulnerable to tighter US monetary
policy are those with wide fiscal and current-account deficits; those viewed as lacking political and policy credibility; and
those heavily reliant on commodity exports. (In the case of Venezuela, all three, combined with policy shortcomings, have
raised the prospect of hyperinflation and default.) Those countries most exposed may be forced to raise their own policy
interest rates in order to avoid destabilising capital outflows and currency depreciation. Also vulnerable are emerging-
market corporates, especially in Asia, which in recent years have eagerly taken advantage of the hunt for yield. Since the
global financial crisis in 2008, emerging-market corporate debt has risen from 50% of GDP to close to 75%, and Chinese
private-sector credit is still growing at three times the rate of nominal GDP growth. This exposure to rising interest rates
would be exacerbated if local currencies were to weaken, which would push up the cost of corporates' foreign-currency
borrowings. Any rolling emerging-market debt crisis would cause panic across the global capital markets and may require
governments to step in to shield their banks from the fallout.
Negative scenario—The rising threat of jihadi terrorism destabilises the global economy
The threat of jihadi terrorism has moved up the international policy agenda after a series of devastating attacks in Lebanon,
Turkey, Egypt, France, Belgium and Indonesia. Despite losing considerable territory in Iraq and Syria, a jihadi group, Islamic
State (IS), remains an especially challenging group to counter—first, because of its self-declared, albeit diminishing,
"caliphate" in Syria and Iraq, which provides both an operational base and a propaganda tool; and second, because of the
ease with which it can recruit and motivate attackers around the world. Taking advantage of its decentralised nature—which
allows individuals to operate under its banner anywhere in the world without prior contact with the group—IS has been
able to strike a wide variety of targets across multiple continents. Besides its ability to win new adherents, IS's other success
has been to garner the backing of internationally established jihadi organisations, such as Ansar Beit al-Maqdis in Egypt and
Boko Haram in Nigeria. The spread of IS and its influence poses a dilemma for global policymakers, who are under
pressure to intervene militarily to suppress the group in its strongholds in the Middle East (especially as hundreds of
thousands of Syrian refugees are seeking sanctuary in Europe). However, they risk reprisals in their home countries by
radicalised sympathisers of IS, which is seeking to retain influence—in the wake of its territorial losses in Iraq and Syria—via
more terrorist attacks abroad. Should this spiral of attack and counter-reprisal escalate, it would begin to dent consumer and
business confidence, which in turn could weigh on US and European stockmarkets.
Negative scenario—Chinese expansionism leads to a clash of arms in the South China Sea
Competing territorial claims in the South China Sea, which have intensified in recent years as China has sought to turn
uninhabited reefs, atolls and rocks into artificial islands (and, in some instances, military bases), could take an unpredictable
and dangerous turn following the election of Mr Trump in November. Notably, his rhetorical baiting of China on Twitter
(which he has accused of, among other things, currency manipulation), and his decision to break prior protocol and speak
directly with the Taiwanese leader on the phone in early December, could destabilise the delicate diplomatic balance
within the region. In response, there is a risk that China may take an even more aggressive approach to exerting its claimed
historical rights to the sea areas demarcated by its so-called nine-dashed line, which encompasses around 85% of the South
China Sea. This could include an acceleration of its island reclamation measures, or declaring a no-fly zone over the
disputed region. Although this might not necessarily result in a military confrontation—China’s bilateral tensions with the
8 Global outlook
Philippines, for example, have actually eased of late, since the election of Rodrigo Duterte—it is worth noting that China
remains mired in multiple island disputes elsewhere, including with South Korea and Japan. As a result, there is a risk that
any Chinese military build-up in the region will raise the danger of an accident or miscalculation that might lead to a wider
military escalation. Any worsening of the row could undermine intra-regional economic ties, interrupt global trade flows
and depress global economic sentiment more broadly.
Negative scenario—Rising tide of political populism in the OECD results in a reversal of globalisation
The election of Mr Trump as US president will prove a massive and lasting setback for global economic and political
integration. Mr Trump’s victory, which has followed the UK's vote to depart from the EU in June and the rise of populist
parties (both left and right) across Europe, such as in Spain (Podemos), Italy (Five Star) and France (FN), can in part be
attributed to the powerful backlash under way against the adverse consequences of globalisation. This nativist sentiment is
in some ways understandable. The benefits of trade liberalisation are spread thinly across most of the population, and thus
often go little noticed; by contrast, the victims of globalisation, such as those living in areas heavily reliant on a dwindling
manufacturing or industrial base, are often concentrated and disproportionately affected. This dichotomy has been
exacerbated by a stagnation in living standards for many people across the OECD in the past decade. In the face of these
challenges, it will prove difficult to ratify trade agreements. We expect negotiations on the Transatlantic Trade and
Investment Partnership (TTIP; a proposed trade agreement between the EU and the US) and the Trans Pacific Partnership
(TPP; between the US and 11 other countries) to fail. There is even a risk of a wholesale protectionist revival if, for example,
OECD countries suffer another economic downturn. The impact of a protectionist wave would be felt around the world. In
wealthy countries with dominant services sectors, rising trade tariffs would push up living costs and depress domestic
demand, causing economic growth to slow. Among major low-cost exporters, such as those concentrated in East Asia,
higher barriers would curb exports, investment and job creation.
Positive scenario—Global growth surges in 2017 as emerging markets rally

Low risk; Very high impact; Risk intensity = 10
The start of 2016 was fraught for global currency and commodity markets, with oil prices slumping towards US$25/barrel
and a raft of emerging-market currencies adversely affected by the start of US monetary tightening. The resulting dip in
global equity markets was exacerbated by growing concerns over China's economic slowdown and the depreciation of the
renminbi. However, since February there has been a significant turnaround in investor sentiment, with global equity
markets rallying and oil prices recovering. With the US outlook now potentially supported by more accommodative fiscal
policy (even though this would, if it materialised, eventually be offset by higher interest rates), the stage may be set for a
period of greater macroeconomic, currency and commodity stability, which could propel global growth, at market exchange
rates, to 4% in 2017. This would be the highest level since 2010, when the global economy was awash with post-crisis
stimulus. A broad-based acceleration in growth would not only provide welcome relief to slow-growing euro zone
countries, which are heavily reliant on export demand, but could also assist in China's economic rebalancing. An
improvement in global demand would provide support for commodity prices, giving welcome relief to Latin American,
Middle Eastern and African commodity exporters.
Negative scenario—The UK government fails to prevent a “hard Brexit”

High risk; Low impact; Risk intensity = 8
Following the UK vote to leave the EU in June, the current government, led by Theresa May, is facing the thorny task of
attempting to negotiate a departure from the EU that will not preclude its continued participation in the single market.
Given the scale of the challenge, we anticipate that the two-year deadline to negotiate a deal (once Article 50 is triggered)
will be extended. This would perhaps entail the UK joining the European Economic Area (EEA) for a transitional period,
after which the UK agrees a final deal that includes the government compromising over its demand to take back full control
of immigration in return for remaining part of the EU single market. However, there are significant downside risks to this
forecast. In particular, securing at least some restrictions on immigration is likely to be a minimum requirement for
Mrs May, and without this any EU trade deal will probably be politically unacceptable at home. If EU leaders do not agree
to this, negotiations would break down and the UK would leave the EU without any arrangement in place. This would
Global outlook 9
almost certainly result in an abrupt depreciation in the value of the pound and a sharp economic slowdown in the UK,
leaving the economy just over 3% smaller than under our baseline forecast. This slowdown would also harm the EU itself,
given that the UK is one of the few relatively fast-growing economies in Europe and is an especially important trade partner
for countries such as Ireland, in particular, and Spain (notably in tourism).
Negative scenario—A collapse in investment in the oil sector prompts a future oil price shock
Very low risk; High impact; Risk intensity = 4
The response of the world’s oil companies to low prices in 2015-16 should raise concerns about the long-term impact on
future energy supplies. Oil and gas projects worth up to an estimated US$1trn have been deferred or cancelled (a process
that started before the decline in oil prices began), despite the fact that a global energy consultancy, Wood Mackenzie,
estimates that over 20m barrels/day of new capacity needs to be brought on stream by 2025 to offset declining output in
ageing fields and meet new demand. History provides repeated warnings of the long-term impact of oil-price slumps: the
surge in oil prices to close to US$150/b in 2008, for example, can be traced back to the investment freeze across the industry
in the wake of the oil-price collapse in 1998. In addition, the planned OPEC (and possible non-OPEC) oil production cut from
January will, if fully implemented, accelerate any market rebalancing and, in turn, exacerbate the impact of the investment
downturn. Meanwhile, contrary to historical precedent, oil prices are still not taking into account geopolitical risks to
supplies, ranging from war in the Middle East to political ructions in Venezuela and outages in Nigeria. Nevertheless, we
believe that the risk of an oil price spike in 2017-21 remains low, reflecting the new output coming on stream from low-cost
producers such as Iraq (and post-sanctions Iran) and the mere six-month timeframe for the OPEC quota deal, as well as the
ability of US shale oil producers to revive drilling activity rapidly in the event of a price recovery.
Regional summaries
North America growth and inflation
(% change)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Real GDP growth
US 2.2 1.7 2.4 2.6 1.6 2.3 2.1 1.1 2.0 2.0
Canada 1.7 2.2 2.5 1.1 1.2 2.0 2.1 1.3 1.9 2.0
Inflation
US 2.1 1.5 1.6 0.1 1.2 2.1 2.2 1.3 1.7 1.9
Canada 1.5 0.9 1.9 1.1 1.5 2.0 2.1 1.5 1.8 1.9
Republican Party has a mandate for The Republican Party will dominate most levels of the American political
sweeping policy change landscape for at least the next two years. It will have more power than the
Democrats in state legislatures, state governorships and Congress. The election
of Donald Trump as president, combined with Republican congressional
majorities, will make passing legislation easier than it has been for the current
administration: this is the first time since 2010 that one party controls the
executive and the legislature.
In theory, this should make the passage of Mr Trump's policy agenda smooth.
In reality, Mr Trump's political philosophy differs considerably from that of
many Republican representatives in Congress. As a result, there will be an
internal power struggle over which measures to pursue. Given that sections of
the Republican Party are highly ideological, clashes between the executive and
the legislature are likely. The battle between the Trump movement and
establishment Republicans is evident from Mr Trump's first appointments: he
chose Steve Bannon, the controversial chairman of Breitbart News, an “alt-right"
website, as his chief strategist, but Reince Priebus, the chairman of the
Republican National Committee and a Washington insider, as his chief of staff.
10 Global outlook
There is little prospect of the Democratic Party diminishing Mr Trump's powers

at the 2018 mid-term elections. The Republicans have a comfortable majority in
the House of Representatives (the lower house), which is reinforced by
gerrymandering. In the Senate, the Democrats will be defending 25 of the
33 seats up for grabs in 2018. Although the party that holds the White House is
often pummelled in mid-term races, the Republican Party starts with a hefty
advantage and should be able to hold onto majorities in both houses.
An unpredictable president means an The biggest question raised by the election of Mr Trump is the extent to which
uncertain outlook he will implement his campaign promises. He has already started to moderate
his position following the hardline rhetoric used in his campaign, and the
contours of his policy agenda will become clear only gradually. He is an
impulsive and unpredictable decision-maker, and the high degree of policy
uncertainty cannot be overstated.
Mr Trump will take action across the range of areas that he campaigned on—
immigration, healthcare, trade and energy—but we expect the actual policy
changes to fall short of campaign pledges. Barack Obama's executive orders
protecting undocumented immigrants will be overturned and access to US
visas will shrink for some countries. However, Mr Trump will not accomplish
the mass deportation of 11m immigrants, nor will he build his wall on the
southern border. He will weaken key planks of Obamacare rather than begin a
huge legislative fight to repeal it altogether. Mr Trump's protectionist rhetoric is
a large risk but The Economist Intelligence Unit expects some targeted measures
rather than a broad increase in trade tariffs. The fossil fuel industry will be
subject to lighter regulation, and federal commitment to greenhouse gas
emissions reductions will weaken.
We have widened our forecast for the fiscal deficit in 2017-18 following the
elections. We forecast that the fiscal deficit as a share of GDP will be 3.4% in
2017 (previously 3.2%) and 3.6% in 2018 (previously 2.9%). This is largely driven
by our expectation that Mr Trump will work with the Republican congressional
majority to pass personal and corporate tax cuts. We also expect that he will
pass legislation to increase fiscal spending on infrastructure, but are sceptical
that this will be on the scale that he has proposed.
The Trump presidency raises concerns Although quick wins are possible at home, reorienting foreign policy will be a
for US-China ties more difficult process. Withdrawing the US from the Paris agreement on climate
change will take years, although Mr Trump will take the momentum out of
achieving emissions-reduction targets. Even if Mr Trump withdraws the US
from the Iranian nuclear deal, we expect Iran to continue to abide by the
agreement's terms.
Mr Trump’s protectionist rhetoric is likely to put economic ties with China
under strain and leave little room for strategic co-operation. Political relations
could also deteriorate—particularly as Mr Trump has already broken protocol by
speaking to the Taiwanese president, Tsai Ing-wen—with worrying implications
for global security and the world economy. Conversely, there is a chance (albeit
a much smaller one) that the US and China could develop a more amicable
relationship. Mr Trump’s threat to withdraw support from US allies in Asia
would be well received in China if it allowed China to boost its influence in
the region further.
Global outlook 11
Mr Trump’s "America First" campaign was run largely beyond the purview of
the Republican Party and often broke with party ideology. We believe that
Mr Trump has little interest in involving armed forces overseas unless it is to
defend US economic interests; he believes that the US is doing too much to
help its allies abroad. However, the precise tenor of his administration will
depend on James Mattis, his nominee for defence secretary, and whoever he
appoints as secretary of state.
The US is set for three more years of Mr Trump will inherit an economy that is in good shape, especially in
economic expansion comparison with the immediate threats that faced his predecessor in 2008. The
economy grew by 3.2% on an annualised basis in the third quarter of 2016, from
1.4% in the second. Rapid employment growth, rising wages, low inflation,
strong consumer spending and a turn in the inventory cycle are all contributing
to the acceleration. In contrast to consumer spending, business investment has
been sluggish. Non-residential fixed investment growth was just 0.1% in July-
September, and has contracted in two out of the past four quarters. This will
improve in 2017 as higher oil prices stem the bleeding in the energy sector.
US: a two-speed economy

(contribution to % change in real GDP, annualised)
Consumer spending Business investment
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2014 15 16
Source: Bureau of Economic Analysis.
Seven years into the recovery from the global financial crisis, it is nevertheless
clear that, without a significant boost to productivity or a broad improvement
in the global economy, economic growth of around 2% is the new normal for
the US. We continue to forecast average real GDP growth of 2.2% in 2017-18, but
the risk to this is to the upside, given Mr Trump’s loose fiscal stance. Private
consumption growth will remain strong, supported by rising incomes, but
gradual increases in market interest rates will prevent a faster acceleration in
consumer spending.
When is the next recession? The Democrats' best hope for 2020 may lie in the medium-term economic
outlook. We forecast a mild recession in 2019 as the economy contracts for two
consecutive quarters, with average growth for the year at around 1%. The
recession will be triggered by a combination of factors: slower economic
growth in China, which will damage global sentiment (causing falls in
overvalued US equity markets and reducing US consumer and business
confidence), and higher borrowing costs resulting from a modest tightening
cycle by the Federal Reserve (Fed, the central bank). Domestic and external
demand will therefore soften in 2019 and cause the first US recession for ten
years. Nevertheless, we expect the economy to recover relatively swiftly, and
annual real GDP growth will rebound to an average of 2% in 2020-21.
12 Global outlook
Although our central forecast is that the business cycle will end in 2019, an
external shock could bring it to a halt sooner. Unprecedented Fed policies have
inflated asset prices, and a turn in investor sentiment—especially if the new
administration gets off to an uncertain start—could harm consumer and
business confidence. Other serious external risks include a sharp downturn in
emerging markets and a break-up of the euro zone.
US policy interest rates will return to the The Fed is trying to set appropriate monetary policy in an unusual era of low
zero lower bound unemployment, low inflation and low interest rates. In August Janet Yellen, the
Fed chair, suggested that Fed bond-buying and forward guidance were now
part of the central bank's conventional policy toolkit, along with changes to the
policy rate. She said that the Fed was not considering raising its inflation target
or focusing on the rate of nominal GDP growth. However, we expect that the
Fed will examine these options in the future if inflation remains below target
and the central bank enters the next recession with little room to cut
interest rates.
Monetary policy will remain accommodative and the domestic economy will
be able to withstand a gradual increase in borrowing costs in 2017-18. We expect
the Fed to lift the key policy rate in December 2016, followed by one more
increase in 2017 and two more in 2018. Despite the slow pace of interest-rate
rises in the US, monetary policy will diverge further from that of the euro zone,
Japan and the UK, where we expect no monetary tightening until at least 2021.
Higher US interest rates will ensure that the dollar remains strong against the
euro, the yen and sterling, prolonging the difficult conditions for US exporters. If
inflation remains below target, the Fed will move more slowly. Similarly, if a
combination of higher public spending, rising commodity prices and new
import tariffs raises domestic inflation, the Fed will be more aggressive. We
expect the modest tightening cycle to last until early 2019, after which the Fed
will cut the policy interest rate to almost zero again in order to support the
economy. It will begin to raise rates again slowly in 2021.
The Canadian economy will bounce The Liberal Party, led by Justin Trudeau, is reshaping Canadian politics in
back from the oil-price-led slowdown dramatic style, after it won a majority at the parliamentary election in October
2015. Passage of legislation is proving straightforward. We expect the
government's second year in power to be more challenging, with tough
decisions to be made on climate change policy, the voting system and the
reduction of internal trade barriers. The two opposition parties are under
interim leadership, and neither has demonstrated a strategy to counter the
Liberal Party. Both the Conservatives and the New Democratic Party will
choose new leaders in 2017. Much can change over the next three years, but we
think that the Liberals will have a strong policy record on which to win
re-election in 2019.
We forecast that real GDP growth will accelerate from 1.2% in 2016 to an annual
average of 2% in 2017-18. The government will continue to support the economy
through additional spending, oil production will rise in line with higher global
energy prices and low interest rates will encourage consumers to spend.
Nonetheless, households will not be able to take on much new debt.
Consumers are financially stretched; according to Statistics Canada, the
household debt/GDP disposable income ratio reached a record high in mid-
Global outlook 13
2016. The bulk of this debt is mortgages, and bubble-like conditions have
formed in some housing markets. These two connected risks represent the
biggest threats to the financial system.
We forecast an economic slowdown in 2019 as the US enters a business-cycle
recession. This will have a knock-on effect on Canada, as the US is the
destination of 75% of exports. Weaker sentiment in that year will also result in
another poor year for investment. Canada's economy will bounce back in
2020-21 as consumer spending picks up and exports benefit from pent-up
demand from south of the border.
Europe growth and inflation

(% change)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Real GDP growth
Europe 0.1 0.6 1.6 1.8 1.7 1.4 1.6 1.6 1.8 1.6
EU28 -0.4 0.3 1.7 2.2 1.8 1.4 1.5 1.4 1.6 1.4
Euro area -0.8 -0.2 1.2 2.0 1.7 1.4 1.5 1.4 1.5 1.4
Russia 3.6 1.2 0.7 -3.7 -0.6 0.8 1.2 1.6 1.7 1.6
Inflation
Europe 3.1 2.4 2.0 2.9 1.8 2.5 2.5 2.3 2.4 2.4
EU28 2.6 1.5 0.5 0.0 0.2 1.5 1.7 1.7 1.7 1.8
Euro area 2.5 1.4 0.4 0.0 0.2 1.2 1.5 1.6 1.7 1.7
Russia 5.1 6.8 7.8 15.5 7.1 5.4 4.4 4.4 4.4 4.7
Timeline for Brexit may be delayed by The consequences of the UK's vote on June 23rd to leave the EU will remain at
a court ruling the forefront of European politics in 2017. The UK prime minister, Theresa May,
is committed to triggering Article 50 of the Lisbon treaty by March 2017. A court
ruling that the government will have to consult parliament on the issue has
raised the risk that the process will be delayed. However, in early December a
majority of parliamentarians agreed to support the timetable after Mrs May
agreed to publish a plan for the Brexit negotiations.
Article 50 sets a two-year deadline to negotiate a withdrawal agreement. The
deadline can be extended only if all European Council members agree. If
negotiations fail and no extension is agreed, the UK would leave the EU
without any agreement in place.
We do not expect a new deal for a UK-EU trading relationship to be reached by
the close of the two-year window for negotiations. After early to mid-2019—
when the UK ceases to be an EU member—a transitional arrangement will have
to be agreed to ensure a continuation of trading relations until a new deal is
reached. The economic impact of this on the UK would be limited to a small
deterioration in export sales, as any arrangement would be unlikely to cover
bilateral trade agreements that the EU holds with around 50 partners.
Alternatively, the EU could extend the negotiating period so that the UK
remains an EU member, although it is unlikely that all remaining 27 members
would agree to this. The third viable option is that the UK leaves the EU in 2019
without any trade arrangement in place and reverts to World Trade
Organisation (WTO) trade rules. However, this would mean a rise in tariff
barriers that both sides would wish to avoid.
14 Global outlook
Risk of a "hard" Brexit has risen The positions taken by the British prime minister and EU leaders have
hardened, suggesting that a compromise solution will be difficult to achieve.
The risk of a "hard" Brexit—by which the UK sacrifices membership of the single
market in return for a restoration of full sovereignty—has increased. However,
both sides have an incentive to reach a relatively amicable deal, and our central
forecast is that a compromise deal will be reached, entailing advantageous
access for the UK to the single market in return for the UK making some
concessions on immigration.
Consumer spending has held up well in the face of Brexit-related uncertainty.
This, along with the resilience in forward-looking survey-based indicators
(particularly the purchasing managers' indices), suggests that the UK economic
downturn in 2017 will not be as sharp as we initially expected. We forecast that
real GDP growth will slow to 0.6% in 2017 and that the depreciation in sterling
will push inflation up to 2.8%. The UK government took a pro-business and pro-
innovation approach to the Autumn Statement delivered by the chancellor of
the exchequer, Philip Hammond. However, the Office for Budget Responsibility
has revised down its economic and fiscal projections, and projects that public-
sector net borrowing in 2020/21 will be more than £30bn (US$38bn) higher
compared with its previous forecast, or £122bn higher in cumulative terms. The
deterioration in the public finances could constrain the government's ability to
tackle the root causes of weak productivity.
UK public-sector net borrowing

(£ bn; excluding public-sector banks)
2015 Budget 2016 Budget 2016 Autumn Statement
160
140
120
100
80
60
40
20
0
-20
2007/08 08/09 09/10 10/11 11/12 12/13 13/14 14/15 15/16 16/17 17/18 19/19 19/20 20/21 21/22
Note. Office for Budget Responsibility (OBR) forecasts from 2015/16.
Sources: OBR; The Economist Intelligence Unit.
Anti-establishment forces will make The Brexit referendum, followed by Mr Trump's victory in the US presidential
gains across Europe election, will provide a boost for anti-establishment and anti-EU political forces
in many countries, and the departure of other member states cannot be ruled
out. The EU is poorly placed to respond to the multiple policy and geopolitical
challenges that it faces, including migration, sluggish growth and high
unemployment, and fraught relations with Russia.
A sense of malaise among large sections of the population is fomenting the rise
of populist, anti-establishment parties that challenge the legitimacy of the EU
and run counter to the principle of collective action. At national level political
systems are becoming more fragmented, with elections resulting in gridlock,
making the formation of stable governments challenging. We expect further
fragmentation across the region, with parties of the traditional centre-left and
Global outlook 15
centre-right struggling to gain enough support to govern effectively. This will

weaken the ability of governments to deliver coherent policy changes or
undertake structural reform.
Renzi suffers heavy defeat in On December 4th Italian voters rejected the flagship constitutional reform
December referendum promoted by the prime minister, Matteo Renzi. Mr Renzi resigned, as he had
pledged to do if the reform was defeated. The outcome is consistent with our
forecast. Anti-establishment populism played an important role in this result,
although the Italian narrative is more complex than this. The opposition parties,
a part of the Partito Democratico (PD) and several centrist former prime
ministers all endorsed a "no" vote. Public opinion data also suggest that Italians
viewed the referendum more as a vote on Mr Renzi than the reform's contents,
some of which had broad appeal.
We expect the president, Sergio Mattarella, to appoint an interim government.
This is likely to be led by Pier Carlo Padoan, the economy minister, or Pietro
Grasso, the speaker of the Senate (the upper house of parliament). The
government will have a mandate to keep the public finances stable, manage the
troubles in Italy’s fragile banking sector and harmonise the disparate electoral
laws in the two houses of parliament before the next election. The most likely
timetable for a general election is early 2018, at the legislature’s natural
conclusion, or shortly before, but the risk of a snap election earlier next year has
risen. The main risk stems from the banking sector, particularly the rescue of
Monte dei Paschi di Siena, which could render capital increases at several
smaller banks impracticable if it fails. This will require delicate handling by the
interim government, the European Central Bank (ECB) and the European
Commission. We maintain our view that a banking crisis will be averted.
In France, the rise of the far-right In France, the far-right Front national (FN) has seen its Eurosceptic, anti-
immigrant and anti-Islam platform boosted by the UK's vote to leave the EU
and the terrorist attacks in Nice, Brussels and Paris over the past 18 months.
However, François Fillon's success in the presidential primary for the centre-
right party, Les Républicains, changes the themes and tactics that will be
deployed during the election campaign. The long-established focus on
immigration and identity politics is now likely to be eclipsed by greater
attention to economic matters as the FN seeks to capture the alienated white
working-class voters who delivered victories to Brexit and Mr Trump. Marine
Le Pen, the FN leader, will pitch herself as the champion of the working classes,
aided by a centre-right opponent whom she will paint as part of the political
elite looking out only for the interests of the middle classes.
Ms Le Pen has been largely successful in the "de-demonisation" of her party,
which under the previous leadership of her father (Jean-Marie) was beyond the
political pale. The FN nevertheless remains anathema to many voters because
of the original pro-Vichy, pro-Nazi and anti-Semitic proclivities of its founders,
its anti-Muslim and anti-immigrant views, and—significantly—because of its
plans to take France out of the euro zone. Moreover, the centre-left and centre-
right parties are likely to unite to try to keep the FN out of power, as
demonstrated most recently in the regional elections in December 2015, and
this would work against Ms Le Pen in a second-round presidential vote. We
maintain our forecast that Mr Fillon will win the presidency next year, but there
16 Global outlook
is a not-insignificant risk that Ms Le Pen will prevail, which we continue to

estimate at about 40%. Another important country to watch is the Netherlands,
where many would like a vote on EU membership. If a referendum is called
there, it could reignite the euro zone crisis.
ECB extends QE programme to end-2017 The ECB is pursuing an exceptionally accommodative monetary policy, with
three pillars:
• major policy interest rates at or below zero;
• an €80bn (US$85bn) per month quantitative easing (QE) programme until
March 2017 and €60bn per month thereafter; and
• a series of so-called targeted longer-term refinancing operations (TLTROs),
aimed at pushing banks to lend more money.
In response to a subdued recovery in growth and inflation across the region
and heightened political risk, the ECB announced in December 2016 that its QE
programme would last until the end of 2017. The ECB's president, Mario Draghi,
stressed that the reduction in the pace of QE after March was designed to
sustain the bank's presence in the market for a longer period than if purchases
continued at the current rate, and should not be viewed as "tapering", which
would signify a winding-down of the programme. In order to ensure the
availability of a sufficient pool of sovereign bonds to purchase, the bank
lowered the minimum maturity for eligible bonds from two years to one year,
and allowed the purchase of bonds with yields below the ECB's deposit rate,
currently -0.4%.
Although Mr Draghi has raised the possibility of an expansion of the QE
programme, practical and political constraints are likely to make this difficult.
We therefore expect tapering to be in full swing in 2018. Downside risks to
global growth during that year, including our forecast for an economic
slowdown in China, suggest that the pace at which the ECB unwinds its
accommodative policy will be gradual. We forecast that the ECB will not
tighten policy rates before the end of our five-year forecast period, in 2021.
The pace of structural reform in the The European jobs market has made steady progress, and the unemployment
euro zone has weakened rate across the 19 euro zone member states was 9.8% in October 2016, down
from 10.6% a year earlier. We expect further progress in bringing down the rate
of joblessness to remain slow. Some of the pain that the euro zone's weaker
economies have endured can be expected to deliver lasting benefits. Structural
reforms that have been passed across the euro area, especially in countries such
as Spain and Portugal, should support private-sector activity in the medium
term. Unit labour costs have fallen significantly in these countries. This has
boosted companies' competitiveness and, crucially, these countries' external
positions. Regulatory reform has improved the business environment, for
example by increasing labour-market flexibility, boosting investment incentives
and opening closed professions. However, there has been a clear slowdown in
the breadth and depth of reforms since the peak of the euro zone crisis.
Central and east European countries We expect much of central and eastern Europe to face a challenging
face a tough year environment during the 2017-21 forecast period, particularly for countries that
have benefited from EU funding. A deadline at the end of 2015 for fund
Global outlook 17
drawdowns from the EU's 2007-13 fiscal period brought an end to a surge in
investment spending. Funding inflows for projects under the EU's 2014-20
funding period have not gained the same kind of momentum. Growth in
Germany—a key market for these countries—will remain steady, averaging 1.4%
in 2017-21, although an economic slowdown in China will dampen external
demand. Nonetheless, the German economy’s changing structure, with
investment and private consumption rising, will provide a boost to central and
east European countries with strong trade links to their larger neighbour. Within
central and eastern Europe there will be significant divergences. The Visegrad
states—the Czech Republic, Slovakia, Hungary and Poland—will see slower but
still decent growth rates in 2017-21, with low oil prices, trade integration with
Germany, generally weighty and competitive external sectors, and a much
smaller fiscal drag than previously supporting growth rates.
Russia will return to growth in 2017 Low oil prices, tight fiscal policy and western sanctions are weighing heavily on
after two years of recession the Russian economy, which will have contracted for two consecutive years in
2015-16. We expect a return to real GDP growth in 2017, but this will be weak.
Russia's fiscal policy remains contractionary as the government struggles to
keep the budget deficit under control. The weak banking sector and high
political risk will depress investment, although external financing conditions for
companies that are not subject to sanctions should start to improve as oil prices
recover, helping the rouble to stabilise. Structural weaknesses will keep trend
GDP growth in Russia below 2% a year in the medium term. The country's
economic potential will remain constrained by supply-side factors, including
outdated capital stock, low investment, a high dependence on natural resource
sectors and manifold institutional weakness.
Tight financial conditions in Russia will continue to have a negative impact on
the economies of other Commonwealth of Independent States (CIS) countries,
with which Russia has strong links through trade, finance and remittances. In
Kazakhstan and Azerbaijan low oil prices will depress export earnings and high
inflation will weigh on household spending. In Ukraine, after two years of
deep contraction in 2014-15 and a year of modest growth in 2016, we forecast
average annual growth of around 3% in the medium term. The forecast assumes
that there is slow but steady progress in reforming the economy and stabilising
the political system, and that there is no return to all-out war in eastern
Ukraine.
In Turkey, there has been some stabilisation following the attempted coup by
parts of the military on July 15th 2016. Although the coup enjoyed no public
support and was quickly suppressed, it was a severe shock to the Turkish state.
It will have long-lasting implications for Turkey's domestic political outlook. The
president, Recep Tayyip Erdogan, is using it as a pretext to go after his
opponents in the military, the judiciary, the police force and academic
institutions, and is pressing ahead with even greater determination to
implement his plan to establish a strong executive presidency. The fallout from
the coup attempt could also hurt the economy in the medium term if it
dampens investor confidence or if institutional capacity is severely weakened.
18 Global outlook
Asia and Australasia growth and inflation

(% change)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Real GDP growth 4.5 4.4 4.0 4.0 4.0 3.9 3.3 3.2 3.6 3.7
ASEAN 5.9 5.0 4.4 4.4 4.4 4.6 4.2 4.1 4.5 4.8
China 7.9 7.8 7.3 6.9 6.7 6.2 4.2 4.2 5.3 4.8
India 5.7 6.7 7.2 7.5 6.5 7.0 8.0 7.4 7.4 7.8
Japan 1.7 1.4 -0.1 0.6 0.5 0.5 0.4 0.6 -0.1 0.4
Inflation 3.6 3.7 3.5 2.2 2.1 2.5 2.5 2.4 2.9 2.8
ASEAN 3.8 4.4 4.4 3.2 2.4 3.2 3.5 3.0 3.2 3.6
China 2.6 2.6 2.1 1.5 2.1 2.2 2.0 1.9 2.7 2.5
India 9.4 9.9 6.7 4.9 5.1 5.0 5.0 4.7 4.9 4.9
Japan -0.1 0.3 2.8 0.8 -0.2 0.4 0.4 0.6 1.3 0.8
Volatility is on the horizon for In the next five years the global economy will continue to shift eastwards
Asian economies towards Asia. However, growth will be slower and more uneven as the need
for internal rebalancing starts to bite in some of the region’s biggest economies.
In 2017 the external environment will remain broadly supportive. Many
commodity prices are past the bottom of the cycle, which has improved market
sentiment regarding exporters like Indonesia, even as importers such as India
continue to enjoy relatively cheap fuel and construction materials. The current
sluggish performance of many developed economies will also ensure that mon-
etary policy tightening in the OECD will be extremely gradual, allowing Asian
policymakers to maintain low interest rates and support economic growth.
However, the region will remain vulnerable to swings in financial market
sentiment. Since Mr Trump's election to the US presidency, markets have once
again raised their expectations for rate increases by the Fed, pushing up longer-
term interest rates and causing a widespread weakening of local currencies
against the US dollar. We expect to see repeated bouts of capital market
volatility in 2017, given the uncertainties around US monetary policy, European
integration and Chinese economic growth.
Meanwhile, financial imbalances in the region will continue to rise, particularly
in China, which has seen a spectacular build-up in leverage since the global
financial crisis of 2008-09. According to the Bank for International Settlements,
total credit to non-financial corporations in China rose from 121% of GDP at the
end of 2009 to 169.1% of GDP in March 2016. We expect to see these tensions
come to a head in 2018, resulting in a sharp slowdown in Chinese growth. The
effects will ripple through Asia, and growth in demand for exports from the US
and Europe will fail to compensate. The coming years will reveal how prudent
Asian corporates have been at a time of cheap credit: there are likely to be some
casualties.
Mr Trump's election adds to the downside risks facing Asian economies. His
freewheeling rhetoric and disregard for established protocols have the potential
to unsettle political relationships and financial markets, but his protectionist
stance is the biggest threat to growth in Asia. The trade relationship with China
played a central role in Mr Trump's election campaign. Combined with the high
degree of autonomy that the US president enjoys on trade policy and
Global outlook 19
supportive majorities in Congress, this makes it likely that Mr Trump will

broaden the range of tariffs that the US already imposes on Chinese imports.
Further ahead, signals by the Trump administration of a reduction in security
co-operation with traditional allies have the potential to trigger a rise in defence
spending across the region.
Mr Trump's decision to withdraw from the Trans-Pacific Partnership (TPP) for all
practical purposes sounds the death knell for full implementation of the free-
trade agreement (FTA), as prospects for a TPP without the US are slim. Pro-trade
leaders in Asia will press on with bilateral and regional FTAs, but these are
likely to be less ambitious in scope than the TPP, covering tariff and some non-
tariff barriers but not the harmonisation of various regulatory standards
demanded by the TPP. However, given the long timeframes involved, the
economic consequences over the next five years are small.
China's slowdown will dominate The outlook for China continues to be the key determinant of our Asia forecast.
Asia's outlook for years Real GDP rose by 6.7% year on year in July-September; we estimate that the
economy will grow at the same rate for 2016 as a whole and will slow only
modestly in 2017, to 6.2%. However, we are much more cautious about the
medium-term outlook. Debt, notably in inefficient, state-owned corporates, is
already at dizzying levels and is growing at three times the rate of nominal GDP.
At the same time, the government's progress on economic reform has been
disappointing, and the structural maturation of the economy is weighing on
growth. We expect economic growth to average just 4.6% a year in 2018-21.
Nonetheless, we do not expect the slowdown to affect all parts of the economy
equally. It will be concentrated in investment spending and industrial
production: investment growth will average just 2.7% a year in 2018-21 (relative
to 7% a year in 2013-17), while industrial production growth will be 4%
(compared with 7.1% in 2013-16). Household consumption and government
spending will hold up better. The tepid pace of growth in the global economy
means that we expect the external sector to subtract from GDP growth
throughout the next five years.
Our forecast diverges significantly from the government's growth target of at
least 6.5% a year. This suggests that the government will either need to revise
down its projections quickly or deploy unsustainable levels of stimulus. There
are dangers to both options. Bringing down growth targets would imply a lack
of control over the economy, a damaging admission for a government with a
pronounced authoritarian streak. But relying on the traditional tactic of
stimulating the economy through public investment and a further expansion in
credit raises the risk of an even harder economic adjustment in future.
We believe that the reckoning will come in 2018: we forecast that real GDP
growth will slow to 4.2% as the debt dynamics force the government to tighten
monetary policy. The government will be reluctant to act before this. The
Chinese Communist Party will conduct a reshuffle of its top decision-making
body, the seven-member politburo standing committee, at the party congress in
late 2017. It will do everything in its power to ensure that the run-up to the
congress is smooth, including maintaining rapid economic growth in order to
20 Global outlook
shore up social stability. At the meeting, the president, Xi Jinping, will

strengthen his hand by appointing favoured allies. He will then feel
emboldened to recalibrate economic policy.
It is possible that growth may slow even more sharply than we expect. A
reduction in credit supply will cause difficulties for indebted firms, possibly
even resulting in a recession. The bursting of credit bubbles elsewhere has
usually been associated with sharper decelerations in growth. However, the
state's deep integration with China's banking system should enable it to resolve
the strains in the financial system relatively smoothly.
Asia: credit to non-financial sectors in China

(% of nominal GDP; end-period)
Non-financial corporations General government Households
300
250
200
150
100
50
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1
2009 10 11 12 13 14 15 16
Source: Bank for International Settlements.
Given the country's central role in global supply chains, a recession in China
represents the most serious risk to the global economy. However, even our
relatively benign central forecast will pose problems for China's Asian neigh-
bours, particularly those that have oriented their economies towards supplying
its industrial sector with raw materials. We forecast that growth in the region as
a whole will slow to 3.3% in 2018, from an average of 4% in 2016-17.
The Bank of Japan is reaching the limits China's slowdown will come at a time when Asia's industrial powerhouses,
of monetary policy innovation notably Japan and South Korea, will still be struggling to rekindle their
economies. Monetary policy in Japan may have reached its limit in terms of its
ability to stimulate growth. The Bank of Japan (BOJ) is no longer pursuing a
target for growth in the monetary base; instead, it is aiming to keep the yield on
ten-year government bonds at zero. A flexible programme of asset purchases
will be used to manipulate the entire yield curve and ensure that it stays
appropriately upwardly sloped.
The BOJ's new approach may give it scope to scale back its QE programme if
inflation continues to disappoint. However, we have long felt that a more
fundamental revision of its monetary policy targets is necessary. Consumer
price inflation has persistently fallen short of the BOJ's projections; at its
November meeting it was forced to acknowledge that core inflation was likely
to stay below the 2% target until 2019. A bolder step would be to scrap its
inflation target altogether and target growth in nominal GDP instead, but a new
strategy is unlikely before the second half of the forecast period.
Global outlook 21
The government may also have to reassess its economic targets as GDP growth
continues to disappoint. (We expect growth to average 0.4% a year in 2017-21.)
Demographic factors are a major reason for the growth shortfall. In fact, GDP
growth per worker stood at an impressive 3.5% in 2015, but, owing to a
shrinking workforce, actual growth for the economy as a whole was just 0.6%.
This suggests that Abenomics, the economic strategy of the prime minister,
Shinzo Abe, is delivering some benefits, but the government's target of 2%
growth looks unachievable, at least without an overhaul of social policies such
as immigration, which neither the government nor the electorate is willing to
consider. There is also little scope for aggressive fiscal stimulus, given the
government's determination to shrink its high level of debt.
The disappointing performance of the economy has not held Mr Abe back
politically; his popularity ratings remain buoyant. Moreover, in October his
Liberal Democratic Party (LDP) agreed to change its rules to allow him to
extend his tenure to 2021. This sets Japan up for an unprecedented period of
political stability. Mr Abe still has ambitions to alter Japan's pacifist constitution
in times of national emergency. To do so, he will require a broad consensus in
the upper chamber, where views diverge considerably, in addition to public
support at a referendum. Mr Abe's case is likely to strengthen if Mr Trump
scales back the US military presence in East Asia, but the debate is unlikely to
be settled quickly.
The Indian economy has been disrupted The Indian government, led by the pro-business prime minister, Narendra
by a botched currency reform Modi, continued its reform drive in November with a sudden currency reform,
whereby Rs500 (US$7.40) and Rs1,000 (US$14.80) notes will be replaced by
new Rs500 and Rs2,000 notes with better security features. Unfortunately, the
demonetisation scheme, aimed at shrinking the black market, was introduced
with insufficient preparation, causing a severe cash shortage during the
wedding, harvest, festival and tourist seasons. The authorities are attempting to
limit the damage, but the negative economic effects could last into the first few
months of 2017, particularly if the crisis disrupts the spring harvest. We now
expect GDP growth in fiscal years 2016/17-2017/18 (April-March) to average just
6.7%, compared with 7.3% previously. (Owing to measurement issues, the GDP
figures are likely to understate the disruption.)
The demonetisation scheme raises fresh concerns about the quality of the
government's ambitious reform programme. An opportunity to simplify the tax
system was squandered when the GST Council, established in September 2016
to decide on the new goods and services tax (GST) rates, agreed to a complex
multi-tier structure for the new tax. An overhaul of India's monetary policy
framework—whereby monetary policy decisions have been transferred from
the governor to a six-member monetary policy committee—was followed in
October by an unexpected cut in the policy rate. Prospects remain uneven for
the numerous initiatives that the government has launched in areas ranging
from urbanisation, healthcare and the manufacturing sector to workforce
training and digitisation.
Despite these shortcomings, the next five years are likely to be transformative
for the Indian economy. Over time, new inflation and budget targets will hold
policymakers to account and support macroeconomic stability. The
22 Global outlook
demonetisation scheme will expand the formal economy and widen the tax
net. The GST, set to come into effect in 2017, will turn India into a genuine
single market. We also expect significant progress on upgrading physical
infrastructure. These measures will drive stronger economic growth in the
second half of the forecast period.
The new Australian government will In Australia the ruling Liberal-National coalition has the thinnest possible
find policymaking a slog majority in the House of Representatives (the lower house) and remains in a
minority in the Senate (upper house). To pass legislation it needs to make
concessions to a host of micro-parties or find cross-party support with the
opposition Labor Party and the Greens. The parties have been able to find
some common ground, passing budgetary savings measures and industrial
reform legislation that had previously been stalled. However, other issues, such
as marriage equality and climate change, remain divisive. Given these tensions,
a change of government at the next election, due in 2019, is likely. An early
election is also conceivable.
The economy is making a gradual transition from high levels of mining
investment towards booming export volumes and greater consumer spending,
supported by loose monetary policy. The third quarter of 2016 was unusually
weak, but we remain confident that the economy will average a healthy 2.9%
growth a year in 2016-17. Conditions will become more challenging when the
Chinese economy slows sharply in 2018. At that point we expect the Australian
dollar to come under renewed pressure and the Reserve Bank of Australia (the
central bank) to reduce its policy rate further.
Latin America growth and inflation

(% change)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Real GDP growth 3.0 2.8 1.1 0.1 -0.7 1.4 2.1 2.0 2.8 3.0
Brazil 1.9 3.0 0.1 -3.8 -3.5 0.5 1.6 2.0 2.1 2.3
Inflation 7.0 7.9 10.0 11.9 18.5 15.5 12.1 7.3 5.2 4.7
Brazil 5.4 6.2 6.3 9.0 9.0 7.2 5.9 4.6 4.7 4.6
Although social and economic ties between the US and most Latin American
countries will remain strong, the risk of tension and a deterioration in relations
under a Trump administration will be high. The policies pursued by the
president-elect in areas such as trade and migration will have an important
bearing, particularly on Mexico, although our forecasts assume that he will not
follow through on some of his more radical campaign pledges, for example
renegotiating the North American Free-Trade Agreement (NAFTA) and
"terminating" it if he fails to get a better deal.
Rising US bond yields hit regional In the US, the election of Mr Trump has pushed up market expectations that
markets after Mr Trump's victory fiscal stimulus and cuts in regulations will be reflationary and spur US growth.
This would benefit Latin America's exporters and countries for which the US is
an important source of remittances. But if stronger US growth leads to a
sustained rise in US interest rates and a further rally in the dollar, this could
revive concerns about the region's capacity to service its hard-currency debt.
Global outlook 23
Following a regional contraction of 0.7% in 2016, Brazil's emergence from a

difficult two-year recession will help to lift the regional growth rate back into
positive territory in 2017. For Argentina, we forecast growth of 2.7% in 2017,
which would help to boost the regional average, but this is subject to downside
risks stemming from the softer outlook for Brazil and an uncertain outlook for
capital inflows in response to higher US interest rates.
The region's terms of trade stabilised in 2016, as the bear market in
commodities abated. In addition, capital flows into the region picked up as
accommodative monetary policy and record low bond yields in the G3 led
investors to search for yield in emerging markets and other risky asset classes,
although this trend has reversed since November following Mr Trump's victory
in the US presidential election. Latin American export data have shown signs of
recovery following last year's collapse in Chinese import demand, and this has
been reflected in a narrowing of the region's current-account deficit, which we
estimate at US$114bn (2.1% of GDP) in 2016, down from US$177bn (3.3% of GDP)
in 2015. We expect moderate gains in commodity prices to support the region's
terms of trade in 2017, before a softening in prices in 2018 linked to a sharp
slowdown in China.
A change in risk appetite was an important factor in this year's rally in several
of the region's currencies (the Mexican peso being an exception), which have
recouped part of the losses sustained during the sell-off of 2014-15. In addition
to renewed inflows of portfolio capital, increased FDI flows have supported
many of the region's currencies. However, since early November regional
currencies have given back part of their gains as US bond yields have risen. We
forecast that US bond yields will not rise much further and that following a
25-basis-point increase in December, the Fed will raise rates only twice in 2017
(50 basis points in total). On these assumptions we expect the currencies of the
larger countries in the region to depreciate slightly against the dollar in nominal
terms from current levels. They are likely to come under renewed pressure in
2018 owing to the ramifications of China's slowdown.
Further interest-rate cuts in prospect The outlook for monetary policy in the region is mixed. In November Banco de
in Brazil México (Banxico, the central bank) made its fourth 50-basis-point rate rise this
year, bringing the policy rate to 5.25%. These rate rises have been undertaken to
alleviate inflationary pressure stemming from a weakening peso, but appear
not to have had much impact on the exchange rate: the peso has hovered
around Ps20.65:US$1 since the US election. We expect Banxico to take its cue
from the Fed in respect of the scale and speed of future rate rises.
Elsewhere in the region we expect rates to fall in 2017, although this will be
contingent on currencies not weakening excessively in response to higher US
rates. The Banco Central do Brasil (the Central Bank) cut rates by 25 basis points
to 13.75% in November (the second 25-basis-point cut since the easing cycle
began in September), and we expect the pace to be increased to 50 basis points
from the mid-January meeting onwards. This will take the Selic policy rate
below 11% by end-2017. Inflation expectations are converging towards the mid-
point of the 2.75-6.25% official target band over the 12-18 month horizon.
Argentina began an easing cycle in April after sharp interest-rate increases
following the December 2015 devaluation. Colombia's next move will be a cut
24 Global outlook
(probably in the first quarter of 2017), following sharp rate rises earlier this year
in response to inflation. Chile and Peru did not have to raise rates as much as
other countries did during the adjustment to weaker commodity prices and
dollar strength, and are now on hold.
Facing large budget deficits, governments in the region have had little scope in
2016 to loosen fiscal policy to stimulate demand, but a cyclical improvement in
the public finances from 2017 will ease pressures. In 2020-21 we forecast
average regional growth of close to 3%. The 2015-16 downturn has exposed the
region's enduring structural weakness of commodity dependence and the need
for policies to diversify economies and encourage productivity gains if the
region is to free itself from boom-bust cycles. The build-up in indebtedness
(particularly hard-currency borrowing by the private sector) during the
commodity boom is a source of risk and a constraint on growth prospects.
The Brazilian president, Michel Temer of the centrist Partido do Movimento
Democrático Brasileiro, is facing his most serious political crisis since taking
office in May. Two ministers resigned in late November over an influence-
peddling scandal, and unease is rising as politicians brace for an imminent
leniency agreement between federal prosecutors and Odebrecht, a construction
company at the centre of the kickback and party-financing corruption scandal
at Petrobras, the state-controlled oil company. This is likely to implicate dozens
of politicians. Ministerial resignations and tension surrounding Odebrecht come
at a difficult time for the government, with the economy struggling to recover
from the recession that began in mid-2014. We still expect the government to
secure congressional approval for a spending cap that would limit public
spending growth to inflation (thus reducing its share of GDP as the economy
recovers). But weaker governability clouds the outlook for a complementary
social security reform that the executive is preparing to submit to Congress, and
we expect only a diluted version to be approved in 2017. Our current forecasts
assume sufficient fiscal consolidation to stabilise the public debt/GDP ratio in
2018-19 at just over 85%, but the risk of slippage is growing.
We downgrade our 2017 growth forecast We keep our 2016 GDP growth estimate for Brazil unchanged (at -3.5%) but
for Brazil to 0.5% revise our 2017 forecast down to only 0.5% growth (1% last month). We
maintain our medium-term forecasts unchanged for the time being. Brazil's
recovery will face headwinds in 2018-19 owing to the slowdown in China and
the recession in the US. Our forecasts for 2019-21 are based on the expectation
that the government that takes office following the 2018 elections will pursue
orthodox policies and take some steps to introduce other pro-growth reforms.
Even so, we do not expect the growth rate to reach 2% until 2020.
An uncertain outlook for Mexico under In Mexico, despite third-quarter results being encouraging (GDP grew by 1%
a Trump presidency in the US quarter on quarter), there is little optimism that these will lay the foundation
for stronger growth in 2017. In addition to headwinds from fiscal austerity and
interest-rate increases, the economy will face uncertainty over the fallout from a
Trump presidency in the US. This will further depress business and consumer
confidence and lead to investment decisions being delayed. As a result, we
have made some downward revisions to our forecasts and now expect GDP to
expand by only 1.8% in 2017 and 2.2% in 2018 (down from 2.4% and 2.7%
previously). This forecast does not factor in further risks stemming from
Global outlook 25
Mr Trump's policy agenda, such as a renegotiation of NAFTA, which could

result in the US applying special tariffs on key Mexican manufacturing exports
in addition to taxes or fines on US companies moving jobs and production to
Mexico. Such a scenario could push Mexico into recession in 2017-18.
A loss of political capital will hinder the efforts of the president, Enrique Peña
Nieto of the Partido Revolucionario Institucional, to enact the structural reforms
passed in 2013-14. We forecast medium-term growth of around 2.8% as institu-
tional weaknesses and regulatory challenges impede the implementation, and
dilute the impact, of structural reforms.
Middle East & Africa growth and inflation

(% change)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Real GDP growth
Sub-Saharan Africaa 4.2 4.7 4.5 2.9 1.1 2.6 3.5 2.9 3.0 3.6
Inflation
Sub-Saharan Africaa 9.0 6.8 6.7 6.9 10.6 10.0 8.1 7.0 6.7 6.8
a Angola, Botswana, Cameroon, Côte D'Ivoire, Equatorial Guinea, Ethiopia, Gabon, Ghana, Kenya, Malawi, Mauritius, Mozambique, Namibia,
Nigeria, Senegal, South Africa, Tanzania, Uganda, Zambia and Zimbabwe.
MENA faces heightened uncertainty Mr Trump's victory in the US presidential election will have reverberations
following Trump's election across the Middle East and North Africa (MENA). The greatest risk posed by
Mr Trump is in the political arena. The president-elect's isolationist stance (and
sympathy for Russia's approach in Syria) is set to upend some of the long-
standing assumptions regarding the US's role in the region as a security
guarantor for the Gulf Arab states, and the more recent direction of US policy
towards Iran. Of most immediate concern is the Joint Comprehensive Plan of
Action (JCPOA), agreed in July 2015 between Iran, the US, Russia, China,
Germany, the UK, France and the EU. Characteristically, Mr Trump has taken
contradictory approaches to the agreement, saying both that he would
"dismantle" the "disastrous" JCPOA, and that he would "enforce it like you've
never seen a contract enforced before"—thus implying that he would keep it. In
any case, the JCPOA now seems under threat: given the complexities of the
agreement, "tough enforcement" could be used to undermine the deal.
However, both Iran's president, Hassan Rouhani, and the EU foreign policy
chief, Federica Mogherini, have argued that the US cannot unilaterally tear up a
ten-year multilateral agreement. Equally, with Russia and China probably keen
to keep the agreement in place, given their economic and, in Russia's case,
strategic ties to Iran, it may well be that the JCPOA would persist even with the
US's withdrawal. Overall, although a US abandonment of the JCPOA would
create some uncertainty about Iran's prospects, we therefore still expect an
increase in Chinese, Russian, Indian and even European investment and trade
with Iran.
On Syria, Mr Trump has more often than not backed the position of Russia's
president, Vladimir Putin, arguing that Russia's focus on attacking terrorist
groups (an argument that overlooks the fact that Russia has mostly hit more
26 Global outlook
moderate rebels in Syria) would match his own priorities. As a result, a Trump
presidency is likely to continue US air strikes against Islamic State (IS) targets
(including also in Iraq as well as, to a lesser extent, Libya), but will be less vocal
about the continued destruction of the country's second city, Aleppo, by
Russian aircraft. Concomitantly, in keeping with its more detached stance, the
US will also probably rein in its backing for a rebel group, the Syrian
Democratic Forces, and its parent, the Kurdish People's Protection Units.
Elsewhere in MENA, however, the US administration's policies may be little
changed. For example, support for Israel is sacrosanct across the US
establishment, and Mr Trump has reiterated his strong backing for the Jewish
state's security during the campaign.
If, as appears likely, Mr Trump abdicates US leadership within the region, the
ongoing regional power-play involving Iran and Saudi Arabia will probably be
stepped up. Although we expect both sides to stop short of outright military
confrontation, the risks of a miscalculation will rise. In response, China and
others may seek to fill the vacuum, but lacking the US's military clout (including
a slew of naval and air bases) their outright influence will be restricted. As a
result, a region that was already mired in instability and conflict is facing
another geopolitical shock for which it, and the rest of the world, is ill-prepared.
Although higher than in 2015-16, MENA After a slowdown in 2015-16, primarily reflecting falling oil prices, the 2017-21
growth will be hindered by low oil prices economic growth outlook for the MENA region, which is dominated by oil
exporters, looks slightly better. The main driver of this improvement is Iran (the
second-biggest economy in the region), whose economy has been boosted by
the removal of sanctions, with annual real GDP growth of 5.6% in 2017-21. We
expect Iranian growth to be driven initially by higher crude oil exports—at
OPEC's November 30th meeting Iran successfully negotiated an increase in its
quota from current production levels. But over time this will increasingly be
eclipsed by rising inward investment, notably into the country's infrastructure.
Other energy exporters, meanwhile, will enjoy a partial reprieve in 2017-18
owing to slightly higher oil prices. Coupled with the positive impact of a
concerted drive to upgrade these countries' business environments in 2015-16,
this will push economic growth up. However, the rise in oil prices will be
insufficient to enable MENA oil exporters to reverse the spending cuts
introduced in 2016 (reflecting the fact that several had fiscal break-even oil
prices above US$100/barrel in 2014). Persisting fiscal austerity and subdued
public investment will weigh on private consumption and the non-oil
economy's performance, thereby restricting GDP growth.
We also expect to see some improvement among MENA's non-oil exporters,

assisted by IMF-linked economic reform programmes (notably in Egypt, which
floated its currency in November). Trade- and investment-related inflows from
the region's oil producers into these countries will remain subdued but will
benefit from a small improvement in global economic conditions. Furthermore,
historically low commodity prices will keep inflation in check and support
non-energy and food-related consumption. On balance, MENA economic
growth will accelerate from an estimated 2.2% in 2016 to 2.7% in 2017 and 3.5% a
Global outlook 27
year on average in 2018-21. Despite the improvement on 2016, this will be well
below the levels witnessed in the decade prior to the Arab Spring, when the
MENA region's annual real GDP growth averaged 5.1%.
Governments are intensifying reform With the price of dated Brent Blend, the international benchmark, forecast to
efforts in response to low oil prices hover around US$60/b—only around half its 2014 peak, when prices briefly
reached more than US$120/b—through most of the 2017-21 forecast period,
economic policy in oil exporting countries will remain focused on adapting to
lower oil revenue. As two years of dwindling oil-related income have dented
fiscal and external buffers, a decisive move away from populist and
expansionary budgets was inevitable to avoid an economic crisis. As a
consequence, governments have now commenced the biggest spending cuts
since the late 1990s. Augmenting this strategy, governments will also seek to
diversify economic activity and revenue away from oil. However, resistance
from vested interests, an opaque business environment and reluctance to
reform rigid and discriminatory labour laws (to protect the local workforce)
mean that progress will be very slow. As a result, the fortunes of most Gulf
Co-operation Council (GCC) countries and other MENA oil producers will
continue to be driven primarily by the oil market in 2017-21.
Another major obstacle to progress in most Gulf states is the slow improvement
in raising tax revenue (although plans are in place to boost indirect tax earnings
via the introduction of a GCC-wide value-added tax from 2018). This partly
reflects policymakers' wariness about inciting unrest, and means that
governments will favour privatisation programmes to replenish state coffers. As
such, we do not expect current policies to trigger any major social upheaval in
the GCC, although there may be a rise in labour militancy.
Growth in Sub-Saharan Africa will We expect the outcome in the US presidential election to have little direct effect
recover from 2017, but not significantly on economies in Sub-Saharan Africa. Some foreign aid inflows from the US
may be reduced in the longer term but overall the impact will be limited.
However, the strengthening of the US dollar, which accelerated in the aftermath
of Mr Trump's election with markets anticipating higher yields there and faster
interest rate rises by the Fed, could have a more pronounced impact. Weaker
African currencies and lower capital inflows are likely to weigh on growth
prospects in 2017. Nevertheless, following a dismal performance in 2016—when
we estimate that Sub-Saharan Africa's rate of economic growth fell to just 1.1%,
the lowest pace of expansion for at least 20 years—we are slightly more
optimistic about prospects for 2017. We expect economic growth in Sub-Saharan
Africa's three largest economies, Nigeria, South Africa and Angola, as well as
several of the region's smaller economies, to pick up. This reflects our
expectation that average prices for most of the region's export commodities—
including oil—will increase, as well as the likelihood of more favourable
weather conditions following the El Niño-related weather shock in 2015-16.
Coupled with some modest domestic policy improvements, this will lift
regional growth in 2017. Progress on structural and policy reforms will largely
disappoint, however. For example, despite Nigeria implementing some market-
oriented reforms—notably axing domestic fuel subsidies and adopting a more
flexible foreign-exchange policy—the administration still appears to be half-
hearted in its attempts at the sort of reforms that would boost outside
28 Global outlook
investment. Indeed, notwithstanding some liberalisation of the naira, foreign-

exchange restrictions remain in place, and in some cases have been tightened.
Similar policy inconsistencies are in place in other countries and weigh heavily
on the region's economic prospects, especially when the external environment
is less supportive than it was during much of the past decade or so. We expect
growth in Nigeria to remain below 1% in 2017. This is better than the contraction
registered in 2016 but far below the average growth rate of nearly 8% seen over
the past 15 years. For the whole Sub-Saharan African region, we forecast growth
of under 3%, far from the level required to boost living standards significantly.
Sub-Saharan Africa's oil dependency

Real GDP (% growth); Oil price (US$/barrel; Brent);
left scale right scale
5.0 120
4.0 100
3.0 80
2.0 60
1.0 40
0.0 20
2012 13 14 15 16 17 18 19 20 21
A further modest increase in the price of oil, coal and many agricultural
commodities will, together with the implementation of some growth-friendly
reforms, support another rise in growth in 2018. However, a sharp slowdown in
Chinese growth in 2018 will moderate the pace of expansion. China's
slowdown will continue to be felt beyond 2018, as the impact of investment
and credit flows from the Asian nation affect the real economies in Africa. This,
coupled with a mild recession in the US in 2019, will lead to a renewed down-
turn in growth that year, once again exposing the structural flaws that plague
most African economies and weaken their ability to withstand external shocks.
Subdued commodity prices will nonetheless be beneficial to some countries,
such as Ethiopia and Kenya, but these will be insufficient to lift the region's
growth significantly. Indeed, the regional average will be below 3.5% annually
in 2018-21, compared with an average of nearly 5% per year since 2000.
The medium- to long-term growth constraints are varied. Policy
mismanagement weighs heavily on the outlook for many countries, including
the regional heavyweights, South Africa and Nigeria, as well as smaller—and
previously fast-growing—economies such as Mozambique and Zambia.
Domestic supply constraints, such as tight labour markets and infrastructure
shortcomings, also reduce potential growth rates while adding to inflationary
pressures and producing large current-account deficits. The private sector will
continue to be held back by difficult operating environments. Government
bureaucracy and corruption will also continue to be tough challenges.
Inflation will ease from 2017 as food With a high dependency on subsistence farming and rain-fed agriculture, Sub-
supplies and exchange rates stabilise Saharan Africa will remain heavily exposed to weather-related shocks. The
impact of these on inflation will be compounded by currency weakness (as in
Global outlook 29
Nigeria, following the devaluation of the naira), which fuels imported inflation.
Nevertheless, assuming more favourable weather conditions than in 2016,
when the region was hit by a severe El Niño-related drought, we expect food
supply to improve. This will help to push down the average regional inflation
rate from an estimated 10.6% in 2016 to below 7% towards the end of the
2017-21 outlook period. Nonetheless, risks are to the upside, as a strong
US dollar in 2017 and the slowdown in China in 2018—which is likely to spook
markets—will weigh on many emerging-market currencies, potentially causing a
renewed spike in imported inflation.
Risk of social unrest and terrorist The political fortunes of Sub-Saharan Africa remain mixed. The holding of
attacks will remain high elections will be commonplace. In addition to the recent polls in Ghana,
The Gambia, Zambia and Gabon, major elections are due in 2017 in Angola,
Kenya and Senegal, among other countries. However, incumbents often use
their time in office to stifle the opposition, weaken institutions meant to check
the powers of the executive and skew the election process in their favour. As a
result, peaceful changes at the ballot box will be rare, notwithstanding the
shock outcome in the Gambian presidential election on December 1st, in which
the incumbent of 22 years was unexpectedly defeated. Coups d'état will also be
rare but conflict, failed governments, crackdowns on political freedoms and
human rights violations will remain widespread. In addition to these long-
running factors, the threat from radical Islamist factions—which include Boko
Haram in Nigeria, Niger, Chad and Cameroon, al-Shabab in Somalia, and
al-Qaida in the Islamic Maghreb, which operates across the Sahel—will persist.
Slow progress on socioeconomic development will raise the risk of these
groups further expanding their influence beyond their current core areas of
operation.
Political risk in Africa will remain high, and there is precedent for this risk to
spill over into significant violence. Social unrest will continue to erupt regularly
as urbanisation gains pace, along with sluggish job growth and frequent
restrictions on political freedoms, and as Internet usage becomes more
widespread, making it easier and quicker to share information. Persistent
pressure from subdued commodity prices on already stretched government
budgets, coupled with rapidly rising living costs and weak job growth, risks
adding to social tensions. At the same time, however, the determination of
African consumers to seek higher incomes in a more stable environment—
coupled with the fact that in the past decade standards of living have improved
for many Africans and stronger, if still fragile, democracies have taken root—will
limit the extent and duration of street protests in Sub-Saharan Africa.
Exchange rates
Foreign exchange markets price in a The US dollar has surged across the board since the presidential election, on the
benign outlook for the US under Trump premise that fiscal loosening under the administration of Donald Trump will
reflate the economy. This has pushed up US bond yields and led investors to
price in the possibility that the Federal Reserve (Fed, the US central bank) will
tighten monetary policy more aggressively than previously thought. Given the
uncertainty about the direction of policy in many areas under the incoming
administration, The Economist Intelligence Unit has not made significant
30 Global outlook
changes to its US macroeconomic forecasts. However, we have made some

adjustments to our forecasts for the dollar against both the euro and the yen to
reflect the dollar's strength against the two majors in the past month. None-
theless, we remain cautious about the impact that Mr Trump's policies will
have in reflating the US economy and do not expect the dollar to strengthen
much against either the euro or the yen from current levels. Although yield
differentials will favour the dollar in 2017-18, we believe that much of this is
already priced in, which leaves the dollar vulnerable to any disappointment on
growth, not to mention possible shocks emanating from erratic policymaking in
a number of areas, such as trade and migration. Changes to the tax system may
encourage US companies to repatriate part of the large cash pile that has
accumulated offshore but, as most of the cash is denominated in dollars, this
should not have much impact on the exchange rate.
Over the medium term we maintain the view that the dollar will weaken
moderately against the euro and the yen, as we expect the Fed to ease
monetary policy in 2019 in response to recessionary conditions, taking the
policy rate back to close to the zero lower bound.
The euro shows resilience in response to The euro's depreciation against the US dollar since Mr Trump's election has
the "no" vote in the Italian referendum revived talk of it breaching parity against the dollar. The Italian referendum on
proposed constitutional amendments on December 4th was seen as a test for
the single currency, as it would lead to the resignation of the prime minister,
Matteo Renzi, and make it more difficult to deal with problems in the Italian
banking sector. The euro fell to a two-year low of US$1.05:€1 on the news that
the changes had been rejected. However, later in the day the euro rebounded,
reaching US$1.07:€1. The intra-day gyrations may have been due to market
positioning (large short euro positions that had to be covered when the euro
rallied). But they may also reflect the euro's resilience to shocks, which has
been in evidence previously, including after the Brexit vote in June. This
resilience will again be tested in 2017 when anti-establishment, anti-EU parties
will contest elections in the Netherlands, France and Germany, although we do
not expect them to gain power. At present we maintain our forecast that the
euro will not reach parity with the dollar and will continue to trade in the
US$1.15:€1 to US$1.05:€1 range that has held for the past year. The European
Central Bank (ECB) would not be unhappy to see a weaker euro, given sluggish
growth and persistent deflationary pressures. But with monetary policy already
extremely accommodative, it is questionable whether the ECB's large
quantitative easing (QE) programme, even it is extended beyond its current term
of March 2017, will have much effect on the euro, which derives structural
support from a large current-account surplus (4% of GDP in 2016). Over the
medium term we expect the euro to strengthen against the dollar, but following
downward revisions this month we no longer expect it to reach its estimated
fair value of US$1.20:€1 by the end of the forecast period in 2021.
The yen had been among the best-performing currencies in 2016, fulfilling its
customary safe-haven role in a context of investor nervousness. But it has given
up a large part of its gains against the US dollar since the start of October, and
the rate of depreciation has accelerated since the US election. As the Bank of
Japan (the central bank) remains committed to a very loose monetary policy
Global outlook 31
(targeting 0% yields for ten-year government bonds), the yen (even more than
the euro) is a natural funding currency for carry trades. This appears to be
driving the yen's current decline, outweighing the support provided by a
current-account surplus, a cheap valuation. We expect the yen to appreciate
against the US dollar in the medium term as its safe-haven appeal again comes
to the fore during the slowdown in China in 2018 and the US recession in 2019.
Fears of a renminbi devaluation revive The renminbi, which is pegged to a basket of currencies, has also weakened
markedly in the past month, reaching Rmb6.89:US$1, compared with
Rmb6.50:US$1 at the start of the year and Rmb6.78:US$1 before the US elections.
The currency has been under pressure since mid-year, as strong domestic credit
growth has created excess liquidity in the financial system and bond yields in
the US have risen. The People's Bank of China (the central bank) has been
selling reserves to contain the fall. Reserves fell from US$3.3trn at the end of
June to US$3.14trn at the end of November. In November alone reserves fell by
US$70bn, the largest decline since the panic in January, although half of the
decline was explained by valuation adjustments rather than dollar sales. The
pressure is stemming from a rise in capital outflows: we expect China to run a
current-account surplus of US$256bn this year and US$200bn in 2017. Although
the authorities may view a weaker currency as desirable and natural at a time
of broad dollar strength, they will be wary of the risks of too rapid a depreciation,
as this would spur increased capital outflows. Hence, the introduction of tougher
measures restricting capital outflows and gold imports in late November. These
are causing consternation among foreign businesses, which have found it
difficult to remit dividends overseas. Restrictions on large foreign acquisitions
are also in prospect. On the assumption that US bond yields will not rise much
further, pressures on the renminbi should ease. But if this proves not to be the
case, and further restrictions on capital outflows do not work, the authorities
could make another one-off adjustment in the exchange rate, similar to the one
in October 2015. This would be destabilising, particularly for other emerging-
market currencies. It would also complicate relations with Mr Trump, who has
accused China of devaluing its currency to "steal jobs" from the US and pledged
during his campaign to impose large tariffs on Chinese imports.
Exchange rate and bond yields

US Treasury 10-year bond yield (%); Rmb:US$1;
left scale right scale
2.6 7.0
2.4 6.9
2.2 6.8
2.0 6.7
1.8 6.6
1.6 6.5
1.4 6.4
1.2 6.3
May Jun Jul Aug Sep Oct Nov Dec
Source: Haver Analytics.
32 Global outlook
Emerging-market currencies are Broad emerging-market currency strength against the majors was a theme in the
vulnerable to rises in US bond yields first half of 2016, reflecting investors' search for yield amid highly
accommodative monetary policy in the G3 and record low bond yields. But the
rally has faltered since mid-year as bond yields in developed countries have
edged up, and has gone into reverse in the past month as US bond yields have
risen smartly (together with less marked rises in Europe and Japan). In the
event of further increases in US bond yields, emerging-market currencies would
remain under pressure. But on our assumption that US yields are unlikely to
rise much further, the outlook should be more stable in 2017. Yields are still
relatively attractive and most emerging-market currencies remain relatively
cheap. Renewed pressures stemming from the sharp slowdown in China and
softening in commodity price growth are likely in 2018. In 2019 emerging-
market currencies will face countervailing forces, suffering a drop in external
demand as the US goes into recession but possibly benefiting from cuts in
interest rates as the Fed eases monetary policy to support the economy.
World trade
World trade
(% change; goods)
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
World trade 3.5 3.9 4.2 2.6 1.7 2.8 2.7 2.0 2.9 3.0
OECD 2.0 2.5 4.1 4.3 2.1 2.7 2.4 1.7 2.6 2.5
Non-OECD 4.6 5.2 3.5 -0.4 1.0 2.9 2.7 2.6 3.5 3.6
Global trade will pick up in 2017, but The victory of Donald Trump, the Republican candidate, in the US presidential
downside risks have risen election could have significant adverse implications for global trade. With the
Republican Party maintaining its majorities in the House of Representatives (the
lower house) and the Senate (the upper house), Mr Trump could enact some of
the pledges on trade that he made on the campaign trail, such as the imposition
of high tariffs on Chinese imports. This could trigger a trade war between the
world’s two largest economies. The assumption underlying The Economist
Intelligence Unit's forecasts is that, faced with the reality of government,
Mr Trump will backtrack on most of his campaign promises on trade.
For now, although we believe that downside risks have increased, we continue
to expect global trade growth to accelerate from an estimated 1.7% in 2016 to
2.8% in 2017 and 2.7% a year on average in 2018-21. This forecast is already
relatively cautious about prospects for global trade. First, we assume that rising
protectionism will inhibit trade in 2017-21. Governments around the world have
introduced a slew of protectionist measures over the past couple of years—
including tariffs on Chinese goods, such as those imposed on Chinese steel by
the US—and we expect this pattern to continue. Second, this forecast assumes
that the US will not ratify the Trans-Pacific Partnership (TPP) or any other
significant trade deals (we did not think that this was likely even if Hillary
Clinton won the presidency). Third, this forecast already incorporates a
structural slowdown in global trade as the integration of global supply chains
abates. Finally, on the demand side, we expect a significant slowdown in the
Chinese economy in 2018, followed by a mild recession in the US in 2019, both
of which will prove a drag on global trade growth.
Global outlook 33
Few major trade-deals will come into The backlash against trade liberalisation that is currently being seen in many
force in 2017-21 countries has wrecked the mega-regional trade deals that had the potential to
boost trade and growth. The proposed agreement between the US and the EU,
known as the Transatlantic Trade and Investment Partnership, is now dead in
the water in the face of public opposition on both sides of the Atlantic. The
other mega-regional trade deal involving the US, the TPP, is highly unlikely to
be ratified by the US under a Trump administration, essentially signalling the
end of the proposed agreement. Efforts by some signatories of the TPP
agreement to save the trade pact following Mr Trump's election appear futile.
There is speculation that Japan, the second-largest economy in the TPP, will lead
the push, after recently winning lower house approval for the enabling
legislation. We are sceptical, however, of Japan’s ability to convince the other
TPP partners of the depth of its commitment to push this forward. Any
reinvigoration of the TPP, therefore, will take place in the distant future, if at all.
With the US turning away from trade liberalisation, China now has the
opportunity to help to set the rules of engagement for south-south trade, at
least. As in the case of Japan, we are doubtful that China can take on the free-
trade mantle for now. An agreement on the Regional Comprehensive Economic
Partnership (RCEP) is a long way off. Talks are continuing on the RCEP, which
would cover more than 3bn people when completed, rivalling the size of the
TPP. The proposed agreement includes the ten Association of South-East Asian
Nations (ASEAN) member states and six partner countries (Australia, China,
India, Japan, New Zealand and South Korea). The benefits of the RCEP will not
be felt until the 2020s at the earliest. In the short term we expect a proliferation
of smaller trade deals, which could eventually lead to a new region-wide
agreement.
The only new transatlantic trade deal that will come into force in 2017-21
(partially and provisionally), is the EU-Canada Comprehensive Economic and
Trade Agreement (CETA), which Canada and the EU signed in Brussels on
October 30th after seven years of negotiations and a stumble over the finishing
line. With less public scrutiny, it is also possible that a trade agreement will be
completed between the EU and Japan. We believe that there is appetite for
more trade liberalisation among Asian countries despite the likely collapse of
the TPP.
Medium-term trade growth will not In the five years before the global economic crisis began in 2008, world trade
return to pre-crisis levels grew by an average of approximately 8% a year. It was not uncommon for
global trade to expand at roughly double the pace of global GDP. Although we
expect global growth to pick up modestly from 2017, we will not see a similar
bounce in trade growth in 2017-21. As highlighted in the World Bank's Global
Economic Prospects report for 2016, a number of factors could explain the break-
down of the relationship between GDP growth and global trade. Compared
with the rapid expansion in the pre-crisis decade, growth in global value chains
is likely to slow further. This reflects the fragmentation of the global production
process as trade in intermediate goods decelerates and imported goods become
less trade-intensive. Reinforcing this trend, growth in trade finance that
supported global trade before the crisis will not return to those rates, owing to
tighter bank regulation. Secular stagnation, via the suppression of investment,
34 Global outlook
will also be a drag on trade growth. Machinery and transport goods constitute a
significant proportion of merchandise trade, meaning that the investment
slump in many countries translates into weak imports from trading partners.
Structural changes in global trade will Although China continues to run a large trade surplus with the US and the EU,
ease global imbalances its overall trade surplus has shrunk. The current-account surplus, which peaked
at 10% of GDP in 2007, has been declining steadily ever since, and we now
expect it to fall to 1.8% of GDP by 2021. Elsewhere, low oil prices are having a
transformative effect on the current-account positions of oil-producing
countries, which ran huge surpluses during the era of high prices. In Saudi
Arabia, for example, the current-account balance moved to a surplus of 17.4% of
GDP a year on average in 2010-14 to an annual average deficit of 7.4% of GDP in
2015-16. The effect of these changes will be to reduce global imbalances, one of
the causes of the global financial crisis of 2008-09, but also to curb excess
global liquidity and the accumulation of foreign-exchange reserves.
Commodity prices
Commodity price forecasts
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Oil prices
Brent; US$/b 112.0 108.9 98.9 52.4 44.1 56.5 60.5 60.3 61.3 64.0
Non-oil commoditiesa
Total -10.3 -7.2 -5.2 -17.3 -3.4 4.4 -0.4 -0.4 1.2 2.3
Food, feedstuffs & beverages -3.5 -7.4 -5.2 -18.7 -3.4 1.5 0.7 0.7 1.6 1.5
Beverages -20.1 -12.2 21.5 -10.3 -1.5 5.0 -1.7 2.1 1.8 1.4
Grains 0.5 -5.9 -12.0 -20.4 -11.0 -1.1 3.5 0.6 1.3 3.7
Oilseeds 4.8 -5.8 -9.0 -21.9 3.0 0.8 -0.5 -0.5 2.1 -1.8
Sugar -17.1 -17.9 -3.9 -21.0 35.2 12.8 -4.0 1.1 0.5 2.5
Industrial raw materials -19.4 -6.8 -5.1 -15.2 -3.4 8.6 -1.9 -2.0 0.5 3.4
Metals -13.2 -6.6 -1.6 -17.3 -6.2 10.5 -3.3 -2.9 0.3 4.4
Fibres -31.5 -0.1 -3.5 -5.0 8.0 3.4 -1.3 -1.8 -0.9 0.8
Rubber -27.9 -15.7 -25.8 -19.2 -8.4 7.9 7.5 4.0 4.3 3.2
a % change in US dollar prices.
The OPEC deal is likely to have a modest In late November OPEC agreed to reduce current oil production levels, in the
impact on oil markets and prices first such move since the 2008 global financial crisis. The deal was finalised at
the group's latest twice-yearly meeting after months of intense negotiations. It
marks a major reversal of the "free-for-all" market-share strategy that Saudi
Arabia and other Gulf Arab states had adopted in 2014 as they sought to drive
down prices and undermine high-cost oil producers. The following are the key
features of the agreement:
• from January 2017, for six months, extendable by another six months,
OPEC will trim its crude oil output by about 1.2m barrels/day (b/d) from
October levels to 32.5m b/d;
• to achieve this, most OPEC members are to reduce output by around 4.6%
from October levels. Nigeria and Libya are exempt, and Iran was granted an
increase of 90,000 b/d from October production levels in its quota; and
• non-OPEC producers will join OPEC's efforts, reducing output by a
combined 600,000 b/d, including 300,000 b/d from Russia.
Global outlook 35
OPEC's efforts have provided a small, immediate, sentiment-driven boost to

prices. On December 5th dated Brent Blend, the international benchmark,
topped US$55/barrel for the first time since mid-2015. OPEC restraint will also
accelerate the rebalancing of the market in 2017, with a small deficit now likely
to emerge in the second quarter that will widen in the third.
OPEC's action is highly unlikely to trigger a return to the sky-high prices seen at
the start of the decade. Despite the headline 1.2m-b/d figure, the planned OPEC
cuts are relatively modest, coming from record-high levels of production in
October. On a full-year basis, The Economist Intelligence Unit expects OPEC
production (including natural gas liquids) to stagnate in 2017. Furthermore,
some cheating seems inevitable, as was seen in previous attempts at OPEC
co-ordination.
In particular, we are sceptical that non-OPEC producers will respect their
commitment to join OPEC's efforts. Russia's offer of a 300,000-b/d cut was vague
and came with caveats. In contrast with its counterparts in many OPEC countries,
the Russian government has no established mechanism for controlling output
levels from the oil sector. Senior figures in the industry are known to be opposed
to cutting production. Moreover, a number of new oilfields are due to come on
stream in 2017, which, all else being equal, will push production higher. It is
possible that some firms may temporarily reduce the level of new drilling,
leading to a natural decline in output from some mature fields. At most, however,
we expect this to lead to output remaining at its 2016 level. Finally, if the initial
price response to an OPEC cut is strong enough, this may also prompt a quicker
revival in US shale output. The gradual increase in the US oil rig count in July-
October 2016 suggests that an increase in shale production could come sooner
rather than later.
Oil production: relentless growth

(year-on-year change in oil output; m barrels/day)
Non-OPEC OPEC
2.0
1.5
1.0
0.5
0.0
-0.5
-1.0
2015 2016(a) 2017(b) 2018(b) 2019(b) 2020(b) 2021(b)
(a) Estimate. (b) Forecast.
Notes. Figures include natural gas liquids (NGLs), but exclude processing gains and biofuels.
Sources: International Energy Agency; The Economist Intelligence Unit.
A lack of clarity on US energy policy will The policies proposed by Donald Trump, the US president-elect, could have far-
see oil prices fluctuate in the short term reaching, yet countervailing, implications for the global oil market. Energy
policies in the US that favour domestic oil producers may, by boosting supply,
exacerbate downward pressure on prices. However, if Mr Trump chooses to
take the US out of the 2015 Paris Agreement on climate change, stronger
demand for fossil fuels would be supportive of oil demand and therefore
prices. A relaxation of sanctions against Russia would be a gift to that country's
oil producers, but the impact on global supply could be offset by a
36 Global outlook
reintroduction of sanctions on Iran. Considering the wider uncertainty

surrounding the outlook for the US economy and the US dollar under a Trump
administration, we have not, for now, factored in a "Trump effect" into our oil
price forecasts.
Weaker demand in China, and then the As the global crude oil market moves into a small deficit in 2017, helped by
US, will weigh on prices in 2018-19 some OPEC restraint, we expect prices to rise. We forecast that Brent will climb
to an annual average of US$57/b in 2017, from an estimated US$44/b in 2016.
However, the rally will lose steam in 2018 as the OPEC deal unravels and
Chinese consumption softens in line with an abrupt slowdown in industrial
production and investment growth. China's slowdown will also have knock-on
effects on other economies and weigh on sentiment globally. We forecast that
Brent will average US$61/b in that year. It will fail to rise much higher in
2019-20 amid continued output growth from OPEC countries and, in 2019, a
recession in the US. Prices will begin to edge up only in 2021, rising to US$64/b.
Steady demand growth and slower increases in OPEC production will provide
support, and the impact of several years of reduced investment will be felt
more markedly in higher-cost producers.
Non-oil commodity prices will fail to We are of the view that the price of industrial and agricultural commodities
recover significantly in 2017-21 will not break away from recent lows in 2017-21. After years of oversupply and
falling prices, tightening supply-demand balances have triggered rapid increases
in the prices of several commodities. However, the rebalancing process is far
from complete, reflecting a sluggish supply response to the low price
environment (as producers cut costs and try to maintain output to preserve
market share), and, for some industrial commodities, insufficient demand from
China. Many agricultural prices remain under downward pressure from record
stocks accumulated through successive bumper harvests in recent years.
Although we expect the current upward momentum to be sustained
throughout most of 2017, the anticipated slowdown in China's economy in 2018
will take its toll on demand and halt the recovery. We see little potential for
price increases until 2020-21, when supply constraints will be more acutely felt.
Hard commodities: Industrial raw materials (IRM) prices remain volatile, but
we expect the price of all six base metals that we track on the London Metal
Exchange (LME) to rise in 2017, the first such co-ordinated increase since 2011.
This will be driven by recovering demand across emerging markets, and further
supported by higher oil prices. However, the tide will turn again in 2018,
especially for metals that are most vulnerable to China’s investment and
industrial cycles and for which China’s relative weight in global consumption is
greatest, like copper and aluminium. On balance, we expect industrial
commodity prices to rise by 8.6% in 2017 as markets tighten and stocks are
gradually worked through. Prices will slip back in 2018, by 1.9%, amid falling
demand from China.
Soft commodities: Despite the negative impact on output of El Niño-related
weather disruptions in 2015-16 and the risks associated with current, albeit
weak, La Niña conditions, we do not forecast an agricultural price shock. This
reflects subdued demand (amid sluggish global growth), record-high inventories
following several bumper harvests in recent years and strong grains outturns
this season. Our foods, feedstuffs and beverages (FFB) index will rise by 1.5% in
Global outlook 37
2017. Unlike IRMs, agricultural commodity prices will remain on a modest

upward trend in 2018, despite the economic problems in China, underpinned
by rising populations and incomes, as well as rapid urbanisation and changing
diets. Indeed, we expect the FFB index to rise through to 2021. Annual increases
will be marginal, however, owing to ample stock availability following
successive bumper crops.
38 Global outlook
Global assumptions
(Forecast closing date: December 8th 2016)
Global forecast
2012 2013 2014 2015 2016 2017 2018 2019 2020 2021
Real GDP growth (%)
World (market exchange rates) 2.3 2.2 2.6 2.6 2.2 2.5 2.4 2.0 2.5 2.6
US 2.2 1.7 2.4 2.6 1.6 2.3 2.1 1.1 2.0 2.0
OECD 1.2 1.2 1.9 2.1 1.6 1.8 1.7 1.3 1.7 1.7
Japan 1.7 1.4 -0.1 0.6 0.5 0.5 0.4 0.6 -0.1 0.4
Euro area -0.8 -0.2 1.2 2.0 1.7 1.4 1.5 1.4 1.5 1.4
China 7.9 7.8 7.3 6.9 6.7 6.2 4.2 4.2 5.3 4.8
World (PPP exchange rates)a 3.3 3.3 3.4 3.2 2.9 3.3 3.2 2.9 3.5 3.5
OECD 1.3 1.3 1.9 2.2 1.7 1.8 1.8 1.4 1.8 1.8
Non-OECD 5.2 5.1 4.7 4.0 3.9 4.5 4.2 4.1 4.7 4.8
World trade growth (%)
Goods 3.5 3.9 4.2 2.6 1.7 2.8 2.7 2.0 2.9 3.0
Consumer price inflation (%; av)
World 4.0 3.8 3.6 3.2 3.8 4.1 3.8 3.0 3.1 3.0
US 2.1 1.5 1.6 0.1 1.2 2.1 2.2 1.3 1.7 1.9
OECD 2.2 1.6 1.6 0.5 0.9 1.8 2.0 1.6 1.8 1.9
Japan -0.1 0.3 2.8 0.8 -0.2 0.4 0.4 0.6 1.3 0.8
Euro area 2.5 1.4 0.4 0.0 0.2 1.2 1.5 1.6 1.7 1.7
China 2.6 2.6 2.1 1.5 2.1 2.2 2.0 1.9 2.7 2.5
Export price inflation (%)
Manufactures (US$) -0.9 -0.3 -0.1 -4.6 -1.0 2.2 1.7 4.7 3.5 3.7
Commodity prices
Oil (US$/barrel; Brent) 112.0 108.9 98.9 52.4 44.1 56.5 60.5 60.3 61.3 64.0
% change 0.9 -2.8 -9.1 -47.1 -15.8 28.1 7.1 -0.4 1.7 4.5
World non-oil commodity prices (US$, % change) -10.3 -7.2 -5.2 -17.3 -3.4 4.4 -0.4 -0.4 1.2 2.3
Food, feedstuffs & beverages -3.5 -7.4 -5.2 -18.7 -3.4 1.5 0.7 0.7 1.6 1.5
Industrial raw materials -19.4 -6.8 -5.1 -15.2 -3.4 8.6 -1.9 -2.0 0.5 3.4
Main policy interest rates (%, end-period)
Federal Reserve 0.13 0.13 0.13 0.38 0.63 0.88 1.38 0.13 0.13 0.38
Bank of Japan 0.08 0.07 0.06 0.07 0.07 0.07 0.07 0.07 0.07 0.07
European Central Bank 0.75 0.25 0.05 0.05 0.00 0.00 0.00 0.00 0.00 0.00
Bank of England 0.50 0.50 0.50 0.50 0.25 0.25 0.25 0.25 0.25 0.25
Exchange rates (av)
US$ effective (2010=100) 98.0 99.1 101.2 113.8 117.9 119.1 119.1 118.6 115.8 113.8
¥:US$ 79.8 97.6 105.9 121.0 108.1 106.7 101.9 100.5 100.2 99.9
US$:€ 1.29 1.33 1.33 1.11 1.11 1.06 1.07 1.11 1.13 1.15
Rmb:US$ 6.31 6.20 6.14 6.23 6.64 7.05 7.35 7.49 7.31 6.71
US$:£ 1.59 1.56 1.65 1.53 1.35 1.18 1.17 1.20 1.21 1.24
¥:€ 102.6 129.6 140.7 134.3 119.9 112.5 108.5 111.3 112.9 114.9
£:€ 0.81 0.85 0.81 0.73 0.82 0.89 0.91 0.92 0.93 0.93
Exchange rates (end-period)
¥:US$ 86.6 105.3 119.9 120.3 107.1 105.8 101.2 100.1 100.1 99.7
Rmb:US$ 6.29 6.10 6.12 6.49 6.79 7.18 7.50 7.48 7.17 7.14
US$:€ 1.32 1.38 1.21 1.09 1.07 1.06 1.08 1.12 1.14 1.17
a The 122 countries for which The Economist Intelligence Unit publishes five-year forecasts.

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The Economist Intelligence Unit PDF

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Country Forecast

Symbols for tables

World growth and inflation

risen significantly with Mr Trump's election. His decision to speak on the

A slowdown in growth to 4.2% is a relatively benign outcome, given China's

Negative scenario—China suffers a disorderly and prolonged economic slump

Negative scenario—One or more countries withdraw from the euro zone

Negative scenario—Beset by external and internal pressures, the EU begins to fracture

Positive scenario—Global growth surges in 2017 as emerging markets rally

Negative scenario—The UK government fails to prevent a “hard Brexit”

There is little prospect of the Democratic Party diminishing Mr Trump's powers

US: a two-speed economy

Europe growth and inflation

UK public-sector net borrowing

centre-right struggling to gain enough support to govern effectively. This will

is a not-insignificant risk that Ms Le Pen will prevail, which we continue to

Asia and Australasia growth and inflation

supportive majorities in Congress, this makes it likely that Mr Trump will

shore up social stability. At the meeting, the president, Xi Jinping, will

Asia: credit to non-financial sectors in China

Latin America growth and inflation

Following a regional contraction of 0.7% in 2016, Brazil's emergence from a

Mr Trump's policy agenda, such as a renegotiation of NAFTA, which could

Middle East & Africa growth and inflation

We also expect to see some improvement among MENA's non-oil exporters,

investment. Indeed, notwithstanding some liberalisation of the naira, foreign-

Sub-Saharan Africa's oil dependency

changes to its US macroeconomic forecasts. However, we have made some

Exchange rate and bond yields

OPEC's efforts have provided a small, immediate, sentiment-driven boost to

Oil production: relentless growth

reintroduction of sanctions on Iran. Considering the wider uncertainty

2017. Unlike IRMs, agricultural commodity prices will remain on a modest

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