Four "Unknowns" Determining the Global Economy in 2017

Núria Mas, Xavier Vives and Alfredo Pastor analyze the key influences for next year

10/10/2016 Barcelona

Núria Mas

Prof. Núria Mas: “El riesgo financiero externo de China es relativamente bajo, y el país tiene margen de caída” / Foto: Edu Ferrer

An increasingly uncertain global economic environment, Brexit and its consequences for Europe, some emerging economies failing to take off, and negative interest rates and their impact on banking. These are some of the major challenges facing the world economy in 2017, according to professors Núria Mas, Xavier Vives and Alfredo Pastor who addressed a session on economic conditions for alumni at the Barcelona campus this month.

While it appears that Europe is starting to emerge from the global financial crisis that began seven years ago, and the United States assumes we’re over it, the world continues to face serious obstacles to economic growth.

These are the four “unknowns” that will affect the global economy in 2017:

1. What future can the banking business hope for in Europe?

For Professor Xavier Vives, "banks are important in Europe. They are providing three-quarters of credit to the private sector which is in contrast to the United States, where they only provide one quarter. So, if things go wrong, the effect is particularly significant in Europe."

Vives claims there is a need to overcome the political uncertainty that still impacts banks. Although several years have passed since the economic crisis, "new threats emerge, such as our recent past in which bank balance sheets were loaded with toxic products, Brexit, promises from U.S. presidential candidates to promote laws to end big banks, or interest rates that remain historically low, even negative."

According to Vives, author of the book, Competition and Stability in Banking, with such low rates it’s very difficult to deliver margin in Europe, so the profitability of banks is harmed. In the United States, however, they are preparing to increase them, with the resulting consequences this will have for financial systems.

For some time we have been experiencing major changes in the banking sector, with the emergence of new competitors for traditional banking. This is the case of shadow banks - institutions that carry out financial operations but are not regulated by banks. Or fintech, with PayPal at the helm, which is attempting to compete for some profitable segments of the banking business by offering financial services through technological innovation.

2. How is Brexit going to affect us?

Against this backdrop, the U.K. is the only country in Europe experiencing economic growth, with a marked improvement in domestic consumption. But, last June, a referendum took place on the country’s presence in the European Union, and most of the population was in favor of leaving. For Núria Mas, this is just the first step in a long process and "without the U.K., Europe will lose global influence. However, it is not the European Union that is under most pressure, but the U.K. itself."

Brexiteers see Europe as an impediment to growth, and seek greater control of their currency, the movement of people and more freedom to sign trade agreements with the rest of the world.

Meanwhile, those who support staying in in Europe say the U.K.´s possible departure would mean losing its influence in international markets, and its trade agreements with member countries.

The end result of Brexit depends largely on the negotiation process. In any case, Mas says that if the U.K .ends up leaving the European Union, "not all countries will be equally affected. Everything depends on the extent of trade relationships. Thus, France, Italy and Spain will not be as affected as the Netherlands, Switzerland and Belgium."

3. Should we worry about the slowdown in China?

After several years of spectacular growth, gone is the time when the Chinese economy was growing at a rate exceeding 10 percent. In 2005, per capita GDP in the important Asian country was 1,393 €, while it now amounts to 7,200 €.

But why is it so important what happens in China? It’s simple: A 1 percent drop in Chinese demand means a 0.25 percent decrease in global demand.

The Chinese slowdown has also particularly affected some other countries in the area, which depend on the production of the Asian giant.

To try to tackle the situation, the Chinese authorities have already announced that it will allocate part of public spending to create pensions and health systems. This will help boost domestic consumption among the population, which would not have to save as much money to cover these needs.

Nevertheless, according to Mas, "the external financial risk of China is relatively low, and the country has room to decline."

4. Will emerging economies keep growing?

According to IMF forecasts, growth in 2017 will mainly come from emerging economies, which will grow at twice the rate of the advanced ones. But some of these economies are not progressing at the expected rate - the appreciation of the dollar is not helping, making imports more expensive.

While China and India are driving the BRIC economies with growth of over 7.5 percent, Brazil has lost 7 percent of GDP in just two years, and its per capita GDP has also fallen since 2012.

Russia, meanwhile, is balancing on a tightrope as a result of falling oil prices. Swift inflation and high interest rates have reduced the purchasing power of its citizens and, therefore, consumption.

Besides Russia, low oil prices have affected countries all over the world, including Venezuela, Brazil, Algeria and Saudi Arabia.