The Strategist

PwC: 2017 will be a year of uncertainty for many countries

01/31/2017 - 13:31

PwC released its annual economic outlook for 2017, which indicates the main trends to be tracked in the global economy in the current year. Analysts of the agency believe that such forecasts are important for business planning and future investing.
Globalization recedes

According to PwC’s expectations, the world trade will be growing slower than world production for the third consecutive year. Resumption of economic nationalism in some parts of the world means that rules of the World Trade Organization will be tested once again.

The world’s largest bilateral trade relationship (between the US and China) are likely to be put under pressure. If Trans-Pacific Partnership or Transatlantic Trade and Investment Partnership fail, this trend may persist in the long term.

US monetary policy will be getting back to normal. The Federal Reserve will continue to tighten monetary policy. In fact, the Fed may adopt stricter measures faster than anticipated, depending on volume and rate of implementation of the new administration’s fiscal plans. On the other hand, those economies which financing depend on the dollar’s value will be having hard times.

Politics leads to economic uncertainty. Less than ten Eurozone countries may be holding elections. PwC expects general election in Germany, France, the Netherlands and perhaps Italy and Greece (which total GDP accounts for more than 70% of Eurozone’s GDP). All these countries may face a violation of their normal political cycle. Spain is likely to hold a referendum on Catalonia’s future.

2017 will be a year of uncertainty for many countries

Despite the fact that the list is not exhaustive, it sets out some of the key areas of macroeconomic risks that one should consider and take into account for the next 12 months.

Repatriation of the US dollar is failing

Tighter monetary policy of the United States can contribute to planned repatriation of US dollars. Malaysia, Turkey and Chile are particularly vulnerable to this risk, as their debt in foreign currency is at a level of 71%, 64% and 55% of their GDP, respectively.

Imperiled banks of these countries may face some pressure if they are not properly capitalized. On the other hand, some countries with resource-based economies, such as Brazil and Russia, could use forecast of higher prices for oil (and other commodities) and floating exchange rate to help reduce influence exerted by repatriation the capital back to the US.

China will be hit by costs associated with growing private sector debt

Debt of non-financial sector of China amounts to more than 250% of GDP. If the non-financial sector debt keeps growing at the same rate as in 2010, the total amount of China's debt can increase by another $ 650 billion by the end of 2017. Relatively capital account of China means that it has a high degree of exposure risk, which, in turn, reduces dependence on foreign currency.

However, growth rate of China's non-financial debt has been climbing up since 2008, which brings a high rate of debt to GDP ratios, which can be observed in the Eurozone’s crisis countries.

Last year, the gap between volume of loans and China's GDP (difference between the loans-to-GDP ratios and long-term trends shows an unacceptable increase) exceeded acceptable levels, indicating a possibility of crisis over the next three years.

This risk will increase if real estate price falls sharply, leading erosion of elements that form basis of the debt.


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