The Four Factors That Will Allow or Prevent a Global Economic Recovery

2017 has started rather well for the global economy, with early indicators suggesting that growth in the early part of this year has exceeded expectations, with nearly all of the world’s leading economies showing signs of a strong start to the year.  After five years of relatively sluggish growth, not to mention the lingering fallout from 2008-2009’s global financial crisis, this is very welcome news.  Of course, not all of the data so far this year has been positive, and there are major risks facing nearly all of the world’s leading economies that could damage each of their prospects for the remainder of this year.  Moreover, growth is likely to be both inconsistent and below pre-crisis levels, even if the economic climate around the world continues to improve.  As we look towards the rest of this year, it is clear that four key factors will determine just how well the global economy performs in 2017.

Protectionism: While fears of the spread of protectionism appear to have eased in recent weeks, there is no doubt that the threat of protectionism remains a significant threat to the global economy.  Last year, the election of Donald Trump in the United States, and Britain’s decision to withdraw from the European Union, suggested that protectionism was a major vote-winner and would continue to spread around the world.  However, while the Trump Administration initially moved to enact protectionist policies, it appears that there are more pro-trade and pro-investment voices within the US government than initially thought.  This, combined with recent election results in Europe, have helped to boost confidence levels among businesses and investors, as the immediate threat from protectionist economic policies has receded slightly.  However, the threat remains in place.  This is particularly a concern for export dependent economies with weak domestic markets, many of which suffered greatly during the disruptions caused by the financial crisis at the end of the previous decade.  As such, should the move towards protectionism regain momentum, the global economy could see its temporary recovery quickly derailed.

Commodity Prices: The sharp fall in commodity prices in recent years has had a major impact on the multitude of economies that are dependent upon commodity exports for much of their economic growth.  So far, 2017 has seen commodity prices trend upwards for the first time in recent years, although, this rise has not been anywhere near enough to bring commodity prices back to their previous levels.  Nevertheless, rising commodity prices have helped to alleviate the losses in export revenues that have severely damaged economies in countries such as Russia, Nigeria and many others.  Some countries in Europe and Asia that are dependent upon commodity imports, particularly energy imports, have also welcomed these higher prices as they have temporarily alleviated the deflationary pressures that seemed to be stuck in place in those countries.  Now, with many key economies experiencing an upturn, demand for commodities could rise at a faster pace, something that would further lift commodity prices in the coming months.  As long as this rise is manageable, higher commodity prices could be a win-win situation for the global economy.

Confidence Levels: Consumer, business and investor confidence levels are rising in many of the world’s most important economies and this is providing yet another boost for economic growth in the first half of this year.  In fact, for many economies, rising confidence levels are the leading driver of growth as they are boosting consumer and business spending and leading to higher levels of investment.  Consumer confidence has been high for some time now and was the key driver of growth for major economies such as the United States and China in recent months, and is now rising in most leading economies.  Business confidence has experienced more ups and downs in recent months, but is clearly trending upwards in most regions, thanks in large part to rising consumer demand levels.  As long as politics does not get in the way, business confidence levels are likely to rise further.  Finally, investor confidence has been relatively high in recent months, as evidenced by soaring share prices all around the world.  Altogether, confidence is at its highest level in recent years, but the question is, can this level of confidence persist for a prolonged period of time.

More Drivers of Growth: At the beginning of this year, it appeared that the United States and China would be key drivers of global economic growth in 2017, and while this has not changed, it appears that other large economies will also play a positive role this year.  For example, Europe’s economy that has growth a little below 2% per year in recent years had been expected to slow in 2017, but early indications are that a weak euro will help boost Eurozone exports, while consumer demand in many European economies is beating expectations.  Asian emerging markets too will provide a significant source of growth for businesses and investors as they remain among the fastest growing economies in the world.  Even many of those emerging markets outside of Asia that have struggled mightily in recent years are beginning to show signs of a recovery and may not prove to be a major drag on the global economy this year.  Overall, while it is unlikely that global economic growth will rise sharply this year, there is an improving chance of a noticeable increase over the 3% GDP growth rates that the global economy has recorded over the past five years, particularly if these four factors turn out to favorably this year.