Asia is becoming more important for global growth

news - 14 JUL 2017

EKN GLOBAL OUTLOOK JUNE 2017: The global financial recovery of recent years has contributed to a more optimistic outlook on global development. The financial markets are characterised by liquidity and risk appetite. Digitalisation and electrification strengthen the demand for Swedish exports.

According to the IMF, global trade in goods and services is expected to grow by 3.8 per cent in 2017, and by 3.9 per cent in 2018.

“High-income countries within the OECD have shown a gradual stabilization, and in coming years growth of around two per cent is expected for these countries,” says Stefan Karlsson, chief analyst at EKN.

However, in 2016 global trade growth was at 2.2 per cent, the lowest level since 2009. Consequently, for the first time, the growth in trade was lower than the global GDP growth that reached 3.1 per cent.

“Compared with the growth of previous decades from the 1980s onward, the current decade’s growth is coping well,” says Stefan Karlsson.

The USA and China dominate the global economy. However, the combined economies of India and Asia are edging towards a more significant role. The collected economic growth in Asia has exceeded that of other regions for a long time.

“Even though it is somewhat lower than previously, Asia’s growth continues to be strong. If existing prognoses are maintained, Asia’s combined GDP will be close to double in ten years,” says Stefan Karlsson.

The USA’s economy has also seen strong development in the past year. Any real effects of the American president’s increased talk of business protectionism are yet to be noticed in global trade or economy.

“The obvious negative consequences implied by more powerful restrictions – for the USA most of all – mean that the main scenario is that they will not be realised. In a benefit to the global economy, the strength of the American political institutions has balanced the unpredictable actions of the American president”.

In addition to low economic activity, the European countries have also faced an increase in political uncertainty, such as the United Kingdom’s decision to leave the EU.

“The consequences of Brexit go way beyond the two-year horizon, and there have been a number of elections in the large European economies including the Netherlands and France, which has strengthened Europe’s political stability”.

The price of raw materials is important for Latin America, Africa and Russia

According to the World Bank, the countries that produce the world’s raw materials face a ten-year period where global market prices for raw materials are expected to only increase slightly over the current levels. Compared to other metals, the prognosis for crude oil is somewhat more advantageous from a producer’s point of view.

 “There is little chance that the high price levels that applied to metals and energy until summer 2014 will return in the foreseeable future,” says Stefan Karlsson.

For many developing and growing markets in regions such as Africa and Latin America, the price of raw materials has the greatest influence on GDP growth. In the case of Latin America, falling prices led to a decrease to the overall regional economy last year. Nevertheless, in 2017 and 2018 it continues to look as though Latin America will experience some growth that can be greatly attributed to Brazil’s rise out of a deep depression.

“A similar development can be expected within the CIS as Russia’s economy is recovering after two years of decreased economic activity,” says Stefan Karlsson.

Yet for sub-Saharan Africa, the future is less bright for the countries dependent on raw materials for hard currency revenues and economic growth.

“Fragile recovery is expected in the region’s two dominant oil economies, Angola and Nigeria. But scarce currency assets and public deficits will also continue to lead to a weakened import demand and delayed payments”.

On the other hand, countries with less dependency on raw materials such as Ethiopia, Senegal and Tanzania continue to grow between five and eight per cent annually. Yet political uncertainty, a deficit of economic reforms, and conflicts pose a threat to the development.

Good liquidity and increased risk appetite in the financial markets

The trend of falling risk margins that began around one year ago continues.

“The current state of the global markets is somewhat brighter, and contributes to an increased demand for interest-bearing assets, which consequently pushes down the risk margins,” says Stefan Karlsson.

This applies to both bonds with a credit score above the investment grade (BBB or better), and below the investment grade. Expansive monetary policy continues in many OECD countries, particularly the Eurozone, which benefits the liquidity of the capital markets. The IMF’s survey of the financial markets shows that credit risks have reduced and macro-economic risks have dropped, thus increasing risk appetite.

The USA has begun a gradual, drawn-out increase of key interest rates. A similar interest policy is late to arrive in Europe and Japan. The ECB is expected to implement increased interest rates in 2018 at the earliest.

“In a situation of low risk margins, the demand for export credit guarantees generally falls,” says Stefan Karlsson.

Demand on Swedish export – Digitalisation and electrification

The export of Swedish goods increased by 13 per cent in the first three months of the year compared wtih the same period last year.

“The recovery of the global economy has boosted Swedish exporting companies, and exports are expected to provide increased support to economic growth in Sweden over coming years,” says Stefan Karlsson.

All in all, the Swedish National Institute of Economic Research forecasts a 3.4 per cent increase in goods and service exports during 2017.

Digitalisation forces the demand for increased flexibility in business models and arrangements, whilst placing higher demands on efficiency and faster processes with both the Swedish exporters and their customers.

“The expansion and integration of telecoms and IT that forms the basis of a digital society has grown in many parts of the world, and is starting to gain momentum. This conveys a growth potential for Swedish exporters in the form of sustainable, more efficient overall solutions for transport, mining, energy extraction and connected ‘smart cities’.

Strong demand for connectivity to electrical power transmission systems and electrification continues in developing countries. The change-over to more environmentally friendly energy extraction also drives the need for new turbines, for example. On the other hand, fewer large-scale projects for the extraction of raw materials have been noted, due to the low oil and gas prices resulting in investment decisions being postponed,” says Stefan Karlsson.