International outlook for 2017.

• Author: Bonser-Neal, Cathy

Prospects for a strong rebound in the global economy have dimmed, as growth outcomes in the advanced economies continue to disappoint and China continues to slow. The International Monetary Fund's (IMF) latest forecast predicts that overall global growth will remain stuck in low gear and below its long-run average, with global output expected to rise by 3.4 percent in 2017--only marginally higher than the 3.1 percent rise seen in the previous year (see Figure 1). This global forecast balances modest growth rate increases in the U.S., Japan and some emerging markets against falling growth rates in the eurozone, the U.K. and China.

Figure 1: Global growth forecasts World Advanced Emerging market economies and developing economies 2015 4.0% 3.2% 2.1% 2016 4.2% 3.1% 1.6% 2017 4.6% 3.4% 1.8% Source: International Monetary Fund ("World Economic Outlook," October 2016) Note: Table made from bar graph. United States

In 2016, solid consumption and residential investment spending has been tempered by weak nonresidential investment spending, limitations on government spending and the dollar's continued appreciation on the export sector. Employment gains continued, with the civilian unemployment rate falling below 5 percent and labor force participation rising slightly.

Inflation is expected to rise closer to the Federal Reserve's 2 percent target as the effects of credit easing, commodity price increases and some wage pressures begin to be reflected in the overall price level. In 2017, we expect the Federal Reserve to maintain its cautious pace of interest rate increases, and for growth to remain sluggish at just over 2 percent. Given recent trends of decreased productivity growth, this rate of economic growth is unlikely to result in significantly higher wage or labor force participation growth. In addition, with U.S. imports comprising over 15 percent of gross domestic product (GDP), sluggish growth in the U.S. will weigh on the growth prospects of its major trading partners.

Europe

In recent years, the European Union (EU)--the world's single-largest market and a major economic and political ally of the United States--has been in the midst of a storm... a perfect storm that has included soaring national debt, weak economic growth, a large volume of refugees and the reemergence of a belligerent Russia. If that was not enough, in June 2016, the citizens of the U.K. voted to leave the EU. This latest event triggered a new wave of economic, political and institutional uncertainties in the advanced European economies. In 2017, we expect the U.K. to remove all European laws from the British statute, so the uncertainties associated with Brexit will persist at least for the first part of the year. We believe that the U.K. is heading for a "hard" Brexit, which means no tariff-free access to the European market, as well as added restrictions on labor movement.

The concerns of a severe separation from the EU diminish our outlook on U.K. growth potential in 2017, which is expected to grow by only 1.1 percent. The pound sterling has fallen to historical lows against the currencies of major trading partners, and we expect the lower exchange rate to continue over the...