The global economy simply does not want to swing into motion; global trade is stagnating. The central banks are doing what they can to support economic development. Calls are now growing loud for governments to push start the economy through higher public spending. However, in the absence of any perceptible economic recovery in the large emerging markets, the successes of these measures will be short lived. In spite of this, a trend turnaround is slowly emerging in these countries, which should improve the global economic outlook.
Economic development in most of the big emerging markets has been anything else but positive in the last two years. The crisis in for example Brazil, Russia and South Africa took its toll on the glowing reputation of the „growth markets“. Even China, which has been the driver of global growth for a long time now, cannot avoid the trend towards consistently lower overall economic growth rates. Beijing has been forced on more than one occasion to downgrade the annual growth rate. This will probably be the case in the coming years too. India was the only positive exception in the last two years, where Prime Minister Modi is bravely tackling new reforms since the change of government in 2014. India’s growth is meanwhile significantly higher than that in China.
Provided no new acute crises flare up, such as the conflict in the Ukraine, and domestic unrest wherever it prevails remains muted, we could soon see the end of the economic crisis in some large BRICS states, namely Brazil and Russia. 2018 might well deliver quite good overall economic growth rates for the countries in question. We are already seeing certain signs of an imminent turnaround out of recession.
However, the presidential elections in Brazil in October 2018 will decide if the reform path of the current incumbent Michel Temer will remain in place. All the measures that are being undertaken from an economic policy perspective will be „provisional“ until then. Nonetheless, the current course of reform is generally leading in the right direction. Industrial production and investment activity are already pointing upwards again – capital investment in the second quarter of 2016 increased again for the first time in ten quarters (+0.4% Q/Q). This is now an important signal that the economy is about to „turn“ after six negative quarterly data for gross domestic product and that no more negative growth rates at least will be reported in 2017. However, this scenario will require the investment climate to strengthen further so that consumption can also return to normal. Unemployment is namely still pointing upwards! The reforms will also decide whether Brazil will be of greater interest again for direct foreign investment. The overdue restructuring of the complex tax system and the expansion of infrastructures would have a positive effect here. The „unpopular“ measures, such as cuts in social spending that are however necessary to consolidate the state budget, pose a risk that the expected economic turnaround might be delayed. They might ultimately be too much for the population and the political climate could harden again.
Russia will benefit more from higher oil prices than the other BRICS states. Even so, the recovery of the oil price to date is hardly enough to finally and sustainably overcome the Russian economic crisis. Another difficulty for the government is the heavy run recently on the state „stability“ fund. If the volume of withdrawals is not restricted here soon, it could possibly be largely exhausted during the coming year. This gives reason to assume the government will adhere to its budget cuts for now. The consumption climate is also likely to remain negative due to a loss of real income in the private sector. Although the recession could be overcome in the first half of 2017, the pace of growth in Russia could remain very limited next year. Our estimate is less than one percent.
The slight upside trend concerning potential growth is expected to remain intact next year in China; demographic development (slight decline in the workforce) and falling productivity will continue to have a further dampening effect on economic growth, so that gross domestic product growth will remain clearly below the rate of 6.6 percent expected for this year. In contrast, we are optimistic for India given the aforementioned reform processes. The economy there is expected to grow by just short of 7.5 percent and therefore stabilise at a very high level. We do not expect the introduction of the countrywide standard VAT, which was recently agreed, will be implemented fully by April 2017. In any event, we believe this will provide significantly positive growth impetus in the years to come, which could be estimated at up to one percent in the best case scenario.