The global growth outlook for 2016 and 2017 has deteriorated since the start of the year, and Brexit only adds to downside risks, that’s Deutsche Bank’s observation of the global macro environment.
In the bank’s monthly ‘The House View’ research document, which is aptly titled ‘Destination Unknown’ Deutsche’s research analysts take a look at the events in the financial world over the past 30 days and weigh in on what these developments could mean for investors.
The global growth outlook has deteriorated significantly
The most concerning trend highlighted in the research report is the deteriorating macro picture. Since the beginning of 2016, growth forecasts have been downgraded across the board. There isn’t a single major economy that’s managed to escape unscathed. Current forecasts predict that the global economic growth rate will fall to 3.0% year-on-year for 2016 only just above the 2.5% recession threshold before rebounding to 3.4% in 2017.
Some of this softness can be attributed to Brexit. Deutsche’s analysts point out that UK economic growth forecast has been cut by more than one percentage point for 2017 following Brexit, and the Eurozone growth forecast has been reduced by 0.5pp.
Further, according to Deutsche’s figures, the world’s two most important economies, the United States and China are both set to report growth below trend this year.
US GDP growth is expected to come in at 1.5% for 2016 and 1.7% for 2017, compared to the current cycle average of 2.1%. Structural factors such as sliding productivity, declining corporate profit margins, rising inventories and political instability around the world are just four of the factors that could weigh on growth. When it comes to China, Deutsche is forecasting GDP growth of 6.6% in 2016 and 6.5% in 2017 both down from the 6.7% forecast previously. High levels of debt, currency depreciation and China’s shift away from a manufacturing based economy towards a service economy are all factors cited as being to blame for the slowdown.
The economic outlook is uncertain in almost all of the other major economic regions around the world. South Africa and Turkey are both plagued by political uncertainty. Question marks surround Argentina’s return to the capital markets, but there are early signs that economic data is improving. South Korea’s growth is expected to slow to 2% during 2017 and while monetary and fiscal easing should prevent a further slowdown, the country’s success is still dependent on that of its larger neighbour. Elsewhere, Deutsche expects Brazil to return to positive economic growth in 2017 as a new government re-establishes itself. A large easing cycle is expected to jumpstart growth. Average GDP growth for 2016 and 2017 year-on-year is projected to be -1.1%. India is the only bright spot. The country’s economy is expected to grow by 7.6% year-on-year on average during 2016 and 2017.
With this deteriorating macro picture in the background, Deutsche’s analysts believe that the Bank of England, European Central Bank, Bank of Japan and Federal Reserve will all adopt a dovish stance for the rest of 2016. While no additional easing is expected from the Fed, further easing is expected from the BoE (QE and rate cuts), ECB (QE extension) and BoJ (rate cut further into negative territory, further easing and possible helicopter money).