Even as global growth is expected to make slight gains this year, the factors that have bolstered developed economies in recent years, such as relaxed monetary policy, low inflation and oil prices, may become more problematic this year.
According to a new report from credit insurer Coface, raw material prices are increasing as the IMF global raw materials index is set to grow by 11% this year after a 10% drop in 2016. Still, despite a recent OPEC agreement that led oil prices higher in December 2016, Coface expects the rebalancing of this market to go slowly as sovereign compliance with OPEC production targets is still in question—as is the risk associated with releasing U.S. shale oil on the market if prices rise further.
Regardless, a background environment of macroeconomic uncertainty and volatility could be further exacerbated by “…peaks of volatility in raw material prices,” though the trend is by no means automatic, Coface said. “Price uncertainties appear to be more closely linked to the issue of predictability than that of volatility,” the credit insurer said. “The relationship between trade and economic activity has weakened (reduced elasticity). This new ‘normality’ (the reasons for which lie in structural factors, such as the slower growth in the world value chain) will lead to continuing disappointing performances in international trade in the coming years, even if there is an upsurge in activity.”
A stronger dollar at least during the first half of the year and increasing uncertainty in developed economies are likely to dampen investment flows into emerging markets, Coface said.
Inflation—down to low levels in 2016—is expected to rise this year, “if only as a basic mechanical reaction to raw material prices having reached their low point in 2016,” analysts said. Still, sudden jumps in inflation are not as likely, given relatively weak internal demand in Europe. “Growing political uncertainties in the U.S. are also likely to limit the rise in inflation, due to their negative impact on short- and medium-term inflation expectations,” Coface said.
– Nicholas Stern, editorial associate