The global economy grew just 3% in 2016 – the slowest annual growth rate since the 2009 recession, according to the National Institute of Economic and Social Research.
The Institute said global growth was held back by extraordinarily low interest rates, high levels of government debt in China, and the recent anti-fraud policy in India which saw Prime Minister Narendra Modi cancel all 500-rupee and 1,000-rupee notes, representative of 85% of the cash in circulation.
The Institute estimates the world economy will grow to 3.1% in 2017 and 3.5% in 2018. There will be a gradual strengthening of global economic growth, but in the medium term, GDP expansion will still be below the rate experienced before the financial crisis in 2007, said Iana Liasze, research fellow at the Institute.
The report forecast that the UK economy would slow from 2% growth in 2016, to 1.7% in 2017 and 1.9% in 2018. Prior to the EU Referendum the Institute forecast 2.7% growth for the UK economy in 2017.
"Robust consumer spending growth was behind the UK’s economic growth last year," said Simon Kirby, head of macroeconomic modelling and forecasting at the institute.
Kirby added that household spending would likely weaken in the next few years thanks higher inflation.
Trump Poses Threat to Global Growth
Speaking to journalists in London this week, Liasze said the new US administration posted a threat to future growth.
“Potential policy changes in the US and any response from the rest of the world pose significant risks to our growth projection. Our forecast assumes established policies,” said Liasze.
“If the US President makes changes to global trade policies these kinds of shocks will add unknown uncertainty into the economy.”
Protectionist trade policies damage economic efficiency and potential growth by weakening competitive forces, and raising domestic costs.
President Trump’s plan to increase infrastructure spending, among other policies, will lead to further appreciation of the dollar, inflation and potentially a rise of interest rates.
Eurozone Imbalances Pose Continued Risk
The Institute sees economic and financial imbalances in the Eurozone as an ongoing risk to global economy growth. The fragility of the banking systems in a number of Eurozone countries, particularly in Italy, add downside risks to the wider economy.
“If German inflation, recently 1.7% annually, rises above 2%, this alone will not provide cause for the European Central Bank to begin tightening monetary policy. The area’s continuing institutional shortcomings, including the incomplete banking union, seem unlikely to be addressed in the current political environment,” said Liasze.
Growth Downgraded for Brazil, India and Russia
The Institute has revised down its growth projections for emerging market economies Brazil, India and Russia in the next two years.
“Deeper structural problems in Brazil continue to weigh on its outlook, and despite the stabilisation of oil benefits the Russia economy, it appears to be much shallower than I would project,” Liasze added.
