Global
Economic
Outlook
4th Quarter 2016
Global Economic Outlook
Introduction|2
By Ira Kalish
In the Q4 issue of the
Global Economic Outlook
,
our far-fung economists ofer their views on the
United States, Eurozone, China, Japan, India, Rus-
sia, Brazil, Canada, and helicopter money.
United States: Growth
remains muted, but fnally
good news on family
income|6
By Patricia Buckley
Growth in the frst half of 2016 was slow, although
preliminary data are pointing to a stronger second
half. Continued job growth and increasing family
incomes bode well for future demand.
Eurozone: Dealing with
Brexit|12
By Alexander Brsch
The direct economic efects of Brexit have so far
been relatively muted, thanks to central banks’
decisions. But this does not imply there will be no
serious long-term consequences, as risks stemming
from a potential disruption of trade relations have
not disappeared.
China: Debating debt and
investment|18
By Ira Kalish
New studies debate whether China’s debt level is
excessive and dangerous, and whether the massive
investment in infrastructure did actually create
economic value. Meanwhile, new data from the Chi-
nese government indicate that the economy appears
to be stabilizing.
Japan: Two arrows too
many|22
By Akrur Barua
The Bank of Japan seems to have run out of moves
to strengthen the economy through monetary pol-
icy. Quantitative easing and negative interest rates
have had little efect. Now the bank is targeting the
long end of the yield curve by keeping 10-year bond
yields close to zero.
India: Finding new feet
through reforms|30
By Rumki Majumdar
While sluggish investment, mining and construc-
tion activities, and farm output in Q1 raised
concerns about the Indian economy, recent reforms,
such as the bankruptcy code and the goods and
services tax, are expected to improve business senti-
ments and ease of doing business.
Russia: Too early for
optimism|38
By Lester Gunnion
Signs indicate that Russia’s recession might be
coming to an end. But despite some good news,
several concerns remain: Foreign investment is
down to a trickle, international sanctions continue
to weigh on the energy sector, and real incomes are
still in decline.
Brazil: Finally, that elusive
rate cut|46
By Akrur Barua
Brazil’s central bank cut its key policy rate for the
frst time in four years in October. After the recent
tumult in the economy, a decline in interest rates
should be a welcome break for consumers and busi-
nesses. But any further cuts depend on infation,
which is still higher than the bank’s target range.
Global Economic Outlook
CONTENTS
II
4th Quarter 2016
Canada: Waiting for the
European Union|54
By Daniel Bachman
In 2014, Canada and the European Union signed
an ambitious trade agreement, CETA. Two years on,
the treaty has yet to come into efect. What’s caus-
ing the hold-up
Special topic: Helicopter
money|60
By Akrur Barua
Helicopter money joins other unorthodox policies,
such as negative interest rates, being foated to
encourage economic growth. In theory, helicopter
money could provide a better alternative to quanti-
tative easing.
Economic indices|70
Additional resources|73
About the authors|74
Contact information|75
Illustrations by Stephanie Dalton Cowan
CONTENTS
III
Global Economic Outlook
Introduction
By Ira Kalish
T
HE global economy has lately been character-
ized by relatively slow growth, weak business
investment, persistent defationary pressures,
and slow growth of cross-border trade in goods and
services. These issues have led to concerns that the
current policy mix in major economies is not up to
the task of fueling faster growth. Indeed, in the ma-
jor developed economies, monetary policy seems
to be the only game in town, with few countries fo-
cused on fscal or structural actions. In this issue of
Deloitte’s quarterly
Global Economic Outlook
, our
far-fung economists ofer views on each of the ma-
jor economies in the world. A common theme ap-
pears to be either inadequacy of policy actions or
uncertainty about what policy makers will do.
We begin with our article on the US economy, in
which Patricia Buckley says that growth is likely to
be better in the second half than in the frst. She
notes that the sharp decline in inventories sets the
stage for a revival of growth. In addition, she points
to the continued strength of the labor market as fu-
eling consumer spending. Plus, an unusually large
increase in real household income not only bodes
well for spending but also helps to reverse the rise
in income inequality. Patricia concludes that the US
economy remains strong and that the major risks to
the economy come from external events as well as
the upcoming presidential election.
Alexander Brsch ofers our next article on the Eu-
rozone. He focuses mainly on the potential impact
of the UK Brexit referendum on the other European
economies. He notes that the initial fears about f-
nancial market disruption have been allayed by a
quick response from the European Central Bank. He
also discusses the mainly incompatible negotiating
positions of the United Kingdom and the European
Union, rendering likely a period of uncertainty. He
concludes that the negotiations will probably domi-
nate the agenda of EU leaders in the next few years.
A close economic relationship between the two is
seen as optimal, but diferences over immigration
policy could undermine such relations.
In my article on China, I discuss the continuing de-
bate over the dangers of debt in the Chinese econ-
omy. I point to a study from the Bank for Interna-
tional Settlements that suggests that China’s debt
relative to GDP is unusually and dangerously high.
Despite this, I point to data showing that credit cre-
ation in China is accelerating, particularly in the
household sector. While this has been intentional
on the part of policy makers who are keen to avoid
a deeper economic slowdown, it exacerbates longer-
term problems. Meanwhile, I point to recent data
suggesting that the Chinese economy may be stabi-
lizing after a period of deceleration.
In his article on Japan’s economy, Akrur Barua
says that an unusually aggressive monetary policy,
involving massive asset purchases and negative
policy interest rates, has failed to achieve its goals.
Although the Bank of Japan has recently signaled
an intention to ease policy even further, Akrur sug-
gests that monetary policy may have gone as far as it
can. Rather, he suggests that the government might
beneft from implementing the third arrow of Aben-4th Quarter 2016
omics: structural reform. However, the government
has, instead, focused on a modest boost to the sec-
ond arrow, fscal stimulus, and Akrur does not ex-
pect this to be especially efective.
India is the focus of our next article, written by
Rumki Majumdar. She says that although the Indi-
an economy faces some headwinds, new legislation
involving tax and bankruptcy reforms could set the
stage for an acceleration of growth. Moreover, these
reforms are likely to embolden the government in
attempting to enact labor market reforms. Such ac-
tion would ease the cost of doing business, promote
more employment, and stimulate more inbound
foreign investment. As for the latter, the govern-
ment is also attempting to ease restrictions on such
investment.
In our next article, Lester Gunnion examines the
Russian economy. He says that there are signs that
the period of declining activity may be coming to an
end, and that the Russian economy might have hit
bottom. He points to a stable currency, slowing in-
fation, an easing of monetary policy, and a revival
in oil production. Yet he also raises concerns that a
number of headwinds will prevent a robust recovery.
These include continued Western sanctions, which
are having a chilling efect on inbound investment
in the energy sector. Moreover, weak foreign in-
vestment will inhibit the diversifcation of Russia’s
economy that is so badly needed. In addition, Lester
notes continuing weakness of income growth and
consumer spending.
Global
Economic
Outlook
Published quarterly by
Deloitte Research
Editor-in-chief
Dr. Ira Kalish
Managing editor
Aditi Rao
Contributors
Akrur Barua
Dr. Alexander Brsch
Dr. Patricia Buckley
Dr. Daniel Bachman
Lester Gunnion
Dr. Rumki Majumdar
Editorial address
350 South Grand Street
Los Angeles, CA 90013
Tel: +1 213 688 4765
ikalish@deloitte
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