It will not be a surprise if we see another downward revision of GDP growth in 2017...
In terms of global economic recovery, 2016 has been the year with the lowest GDP growth rate since the financial crisis began in 2009. Amongst many landmark events, the slowdown for GDP growth in 2016 stemmed from weaker US activity in the first half of 2016, together with the UK’s referendum vote to leave the European Union, putting “Brexit” on the horizon. Although the International Monetary Fund (IMF) emphasised that the result of the UK referendum had been contained, the world saw an orderly repricing in the financial markets after the initial shock of the Brexit vote. The amount of uncertainty is mounting even though negotiations with the EU on how to leave have not yet started – which means the growth rate for advanced economies is likely to be only 1.6% in 2016.
It will not be a surprise if we see another downward revision of GDP growth in 2017, if IMF forecasts in recent years are anything to go by. Currently IMF estimates the global GDP growth in 2017 at 3.4% (January 2017). A pattern of downward revisions for GDP growth is scary when we look at what could have been put in place for the world to get back on track in 2016. So, which actions should have been taken to turn the tide? Reforming structures in societies and businesses, for one. Policy recommendations on key economic measures like: demand support, enhanced crisis management in the euro area, like fiscal consolidation plans and more widespread use of public investments etc. On the reforms mentioned some have been dismissed on populist agendas for being non-urgent. While others have been ‘politically impossible’ to pass. Political focus has been on very short term issues and the next election, and not on making the necessary changes to improve the foundation to reignite growth.
In five years, the forecasted global GDP growth rate for 2016 has gone from 4.9% to 3.1%. So, what happens now? Protectionism! Just to make it all worse. Surely the shipping industry is not the only industry, government or international forum that has got its work cut out to make a U-turn possible in 2017.
As the order of business in 2016 has been political conflicts and inward-looking policies, the World Trade Organisation (WTO) asks all nations to resist the urge for protectionism. With the UK referendum and the newly elected president in the United States, there is an increasing scepticism towards the benefits of cross-border economic integration lurking in public opinion. This is stimulated by concerns over the impact of international competition, sparked by weak growth in advanced economies. However, as trade restrictive measures can discourage trade flow and have knock on effects on economic growth and job creation, supporting protectionist policies will do more damage than good in the long run.
As the US elected Donald Trump as their new president, they joined a queue of countries adopting populist and inward looking policies. Their dissatisfaction with the political establishment could well be linked to the slowdown which is visible in the reduction of US industrial production.
The protectionist measures avowed by Donald Trump may become a huge issue for the shipping industry across all segments, as they could affect demand and represent a significant backlash against globalisation.
However, with the upcoming “Keynesian inspired Trumponomics”, the US might regain momentum domestically, as it will focus more on fiscal policies than monetary policies. The investments will primarily be in infrastructure, which has previously proved a safe way to generate growth. However, if the materials are sourced domestically, this growth will not flow into the shipping industry.
If the US economy regains some momentum in 2017, it will be due to restocking of drawn down manufactured inventories as well as a recovery in investments. Currently the unemployment rate stands at 4.7%.
The recent rate hike by the Federal Reserve also comes as a signal of confidence in the economy’s recovery and potentially could help lift global growth. Though if inflation remains low, the Federal Reserve could risk pushing up the value of the dollar instead.
Despite increasing fear over the struggling global commodity exporters expressed by the IMF, China’s figures for the first 11 months of 2016 show they imported the highest accumulated amount of iron ore and coal ever. This has been a helping hand to the dry bulk industry. China’s steady but slow-moving transition to be more dependent on private consumption and services seems, at least for now, to have fewer implications for the commodity exporters. This is mainly due to China turning its focus back to the continuing development of its infrastructure.
In the shadow of the US election, China has fast-forwarded their One-Belt, One-Road (OBOR) initiative, at the same time as Donald Trump has threatened to tear up the Trans-Pacific Partnership (TPP), which would cripple US leverage in Asia. With a minimum spend of USD 1.4 trillion over 35 years on infrastructural investments, OBOR will generate global growth and envisages a comprehensive infrastructural network. This will also encourage the development of new markets in central Asia – for Chinese goods that is.
In August 2016, Japanese PM Shinzo Abe launched a massive economic stimulus package in Japan, as growth decelerated to 0.7 % in the second quarter of 2016. Together, with the postponement of the “consumption” tax hike and additional monetary easing, it is expected that this will support private consumption in the short-term and offset some of the drag from the increase in uncertainty and weak global growth.
What is happening in South Korea now on government and shipping industry issues can only be described as unproductive and backward looking.
It is important that the European focus stays on job creation and growing economic activity and foreign trade. Especially as many other issues constantly pop up and scream for attention. When dealing with Brexit, the European Union (EU) must focus on decreasing the economic, political, and institutional uncertainty and the likely reduction in trade between the EU and the UK.
The unemployment rate has also been on the decline since mid-2013 and continued declining towards 8% through 2016. While things were moving in the right direction in 2016, it would have been nice to see a stronger growth of more than 1.7%. Especially as the outlook looks somewhat bleak for key European nations and the EU. Anti-integration and inward-looking policy platforms gained traction during 2016 and may fuel further political discontent.
As we enter 2017, BIMCO stresses the impact of a possible backlash against globalisation. If the growth and embracing of protectionist policies throughout 2016 becomes a reality, it may pose a huge threat to the shipping industry and could disrupt trade flows and limit economic growth.
For advanced economies to avoid weaker overall growth and stagnation, it is important that world leaders focus on generating economic growth that spurs international trading - avoiding “the globalisation of nationalism”.
Additionally, as BIMCO has stated previously, a one-sided monetary approach is not enough. It is essential to combine this with fiscal support to generate momentum.
World GDP growth projection from the IMF expects 2017 will see a higher growth rate after declining rates experienced in the past two years.
There is a possibility that persistent low growth will spur policymakers to take comprehensive and coordinated action to combat a further slowdown.