Dubai: Global economic growth is expected to remain low in 2017 but will be relatively stable with continued support from accommodative monetary policies and fiscal easing, but there are large number of unpredictable factors that could change the outlook, said Dr Mohamed El-Erian, chief economic adviser at Allianz and Chair of President Obama’s Global Development Council.
Addressing the ninth Arab Strategy Forum in Dubai, El-Erian said, there is a general consensus among economists and analysts that global economic growth will stabilise and will be slightly better next year.
“This argument is supported by the continued central bank support to growth, the gains in financial markets and favourable market reactions to Trump’s election win,” he said.
Despite the rising optimism in the financial markets, the world economy, El-Erian said is on very shaky foundations.
“Factors such as anti-establishment movements across the world, Brexit, elections in France, the Netherlands and Germany are some the unpredictable variables that could change the outlook drastically,” he said.
Amid the consensus on global growth stability, he said there is huge unpredictability lurking behind. Increasingly central banks are less willing to continue with unconventional monetary policies (which came in response to the great global recession) to support and sustain economic growth.
While the Fed is set to announce a 25 basis points rate hike, the European Central Bank (ECB) slashed its monthly asset purchase programme last week, signaling change in their approach.
“Central banks have been doing it [policy easing] for too long. The benefits of unconventional monetary policies have come down. These [policies] are becoming too costly,” said El-Erian.
Policy actions of ECB and Bank of Japan are becoming increasingly ineffective. “I don’t think the Fed wants to go down that route,” he said.
With monetary policy becoming less effective, El-Erian expects supportive fiscal policies and increased government spending to aid growth in the developed economies.
“2017 is going to be a year on fiscal action. We are going to have more active fiscal policy regime in the US and UK. The big questions mark is on Germany, if it will join this policy bandwagon,” he said.
Under Trump, the US is expected to see further pick up it inflation, supporting stronger economic growth and financial markets gains.
With improved economic growth prospects and market conditions El-Erian expects fund flows into the US to surge this year, boosting the dollar further.
