UBS predicts global economic outcome for 2017

Predicting what financial markets are going to do next just got harder, much harder. Beyond Donald Trump's inauguration on 20 January, it's all guesswork. But despite it being mid-November, the economists at UBS have already written a 207-page epic on the outlook for the next two years.

Trump might be in the White House, Theresa May determined to trigger Article 50 by the end of March, and elections/referendums across Europe threatening the very existence of the single currency - but it's not all bad news.

"Our baseline is for nominal global growth to increase for the first time in seven years (real growth up from 3.1% to 3.5%), driven by above-consensus growth in the US, a recovery in oil-sector-related investment, and several large emerging markets emerging from recession," writes UBS chief economist Arend Kapteyn.

If Trump does launch a massive programme of fiscal spending and tax cuts, and tones down protectionist policies, US growth might receive a 20 basis-point boost, possibly more.

Bank sector deleveraging helps, and it's worth remembering that UBS factors in both policy-induced slowing in the Chinese property sector and political uncertainty-induced slowing in the eurozone. "We could be wrong on both," admits Kapteyn. Let's hope so.

Not a story of optimism

But there are no party poppers here, as UBS seeks to cool enthusiasm.

"This is not a story of great optimism - mostly a modest improvement in investment, which has been contributing only a third as much to GDP growth relative to its pre-GFC [global financial crisis] contribution," it says.

UBS points out that markets are priced for "low for longer" interest rates, which makes them vulnerable to any shift in policy. A two standard-deviation shock in oil prices to the upside would lead to a "very significant overshooting" of developed market central bank inflation targets.

The broker tips world real GDP growth to hit 3.5%, up from an estimated 3.1% this yearIf that happens, expect a "2013-like sell-off in fixed income, equity and emerging market foreign exchange markets", the so-called "taper tantrum".

It's also unclear how markets will cope with unwinding of quantitative easing (QE) from next year and a potentially large increase in US debt issuance. There's a real risk of trade disputes and a dismantling of free trade agreements, too.

Currently, the broker tips world real GDP growth to hit 3.5% in 2017, up from an estimated 3.1% this year. It has India growing at 7.4-7.8% over the next three years, and China slowing from 6.7% to 6.4% then 6% in 2018.

In the west, the US economy should expand by 2.4% next year and, with few imbalances that could result in a recession, barring a shock event, the Federal Reserve will raise interest rates to 1.0-1.25% by year-end 2017 and to 1.50-1.75% a year after.

UK growth halves

Here in the UK, growth halves in 2017 to 1%, according to UBS.

"The outlook for the UK will be crucially determined by the EU exit process, which we expect to start officially by the end of first-quarter 2017," it says. "We anticipate weaker investment and a softer labour market, with rising inflation squeezing real incomes and consumption.

"We expect the [Bank of England] to return to an easing bias as domestic demand slows, with a small cut in Bank Rate and a resumption of asset purchases by mid-2017."

The external environment, while a bit better, is unlikely to pick up substantiallyOver the channel, eurozone growth shrinks from 1.6% to 1.3% next year. "While eurozone purchasing managers indexes (PMIs) have held up well after the UK referendum, the likely pick-up in oil prices and inflation should cut into household purchasing power," the broker warns.

"The external environment, while a bit better, is unlikely to pick up substantially. Game-changing fiscal initiatives in Europe appear unlikely."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.