Trump and Brexit threaten economic stability of G7 countries

26 May 2017 Consultancy.uk

G7 GDP growth appears to have stabilised to around 1.8%, with little deviation across member countries – Big Four consultancy PwC has found. In a report highlighting a possible break from the uncertainties of the global financial crisis however, the firm also noted that productivity growth remains low, and cites key uncertainties from US protectionism and Brexit as possible causes for concern.

The global economic crisis took a toll on a variety of key economic indicators, across G7 economies, with real GDP growth at the end of 2009 falling beneath -5%. The Group of 7 have since recovered, as a new report from PwC, titled ‘Global Economy Watch: A turnaround for the G7?’, shows. The consultancy firm explores the effect of the financial crisis on resent economic indicators from developed economies – as well as current outlooks.

The G7 is a group of 7 major economies, including Canada, the United States, Japan, France, Italy, Germany and the United Kingdom. The EU is also represented in meetings, while the group was formerly known as the G8, which included Russia, until their expulsion following the military annexation of Crimea in 2014.

Recent gradual uptick in G7 economic activity

According to the latest hard-data from PwC, the G7 economies grew by 1.7% year-on-year between Q4 2015 and Q4 2016. Economic growth in advanced economies has reached a point of relative stability, with dips and peaks relatively stable and in line with the average post-crisis growth rate of 1.8% per annum.

The relative strength of GDP growth, which has returned to the levels seen pre-crisis can be attributed to a number of factors, according to the consulting firm. The G7 economies continue to find themselves in a ‘highly accommodative monetary’ moment, with interest rates still at historic lows. Governments too have begun to spend more on infrastructure projects, while demand from the E7 emerging markets, which are themselves seeing an upturn in activity, is spurring exports of high-value goods and services from the G7.

G7 post crisis productivity growth

The report notes that, while GDP growth has improved, other economic factors – particularly productivity – continue to flounder. Post crisis productivity growth rates have been lacklustre at best, and dramatic at worst, when comparing the difference between pre- and post-crisis measurements. Across the G7 productivity growth has fallen to around 0.8% between 2008-2015/6 from 2.3% between 1971-2007.

US productivity has been the most robust, falling from around 1.7% per annum for the years 1971-2007 to around 1% for the period 2008-2015/6. Canada too has performer relatively well, when comparing pre- and post-crisis levels, at around 1.4% and 0.9% respectively. The UK – which remains in the grips of an apparent productivity paradox – has seen its productivity stagnate, from a relatively height 2.5% prior to the crisis.

Various explanations are provided by the firm for the drop in productivity, including a decrease in infrastructure spending by OECD economies – which tends to affect productivity growth – by around an average of 8% annually since 2010. The decrease is in part the result of higher debt levels for national economies from, in part, supporting a financial system on the brink of collapse.

While productivity has remained relatively stagnant, the research has found that growth rates across the G7 have become considerably more aligned. The standard deviation for growth between economies has fallen sharply over the past three years to less than 0.5%, from a height of more than 2% in 2012. According to the firm, the trend may mean that growth across the G7 economies have, or are about to achieve, “escape velocity.”

Adjusted for economic cycles change in fiscal stance

Market Velocity

PwC’s analysis also points to a number of factors that suggest such escape velocity may have been realised – although key uncertainties, from Trump’s presidency to Brexit remain:

Monetary policy: Europe, in particular, has enjoyed relatively cheap money through the regional qualitative easing programme. Through the programme, the disparities in the cost of borrowing have been evened across the region, allowing businesses in Italy, among others, to access relatively cheap financing (2%).

Fiscal policy: G7 governments have begun to loosen the fiscal screws as their outlook, and budgets, improved. With a number of governments planning to invest in infrastructure upgrades (Canada, Japan, the UK and Germany).

Emerging imports: China and Brazil have seen their economies pick up steam, the former in line with increasing credit channelled via the so-called policy banks, the later through reduced turbulence. The result is general improvement to demand for imports from, among others, the G7.

Increased trade openness

The firm’s researchers also noted that, while improving productivity is one way to improve long-term GDP growth, the current extreme political situation in the US is creating key areas of uncertainty – for businesses and global leaders.

The policy initiatives put forward by Donald Trump in his shock successful Presidential campaign could, according to the firm, lead to a trade war in the most extreme case. A tit-for-tat response could, according to the Peterson Institute, lead to a decrease of around 3% in US GDP over a two-year period. For business, considerable uncertainty might unfold, creating a negative outlook for various business related activities.

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