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The economy abroad iwd 30. November 2016

Europe must lead the way

First Brexit, then the election of Donald Trump as the new US President: right now, the world economy is in total disarray. Even though – according to IW foreign predictions forecasts – the global growth rate is set to increase slightly in the coming year, there is still a lot to do – especially for Europe.

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At first glance, the current IW forecast for the global economy does not look too bad at all.

This year gross domestic product is set to grow by 3 percent worldwide, and for 2017, IW economic researchers are predicting forecasting slightly higher growth of 3.25 percent.

As part of this general trend it is predicted expected that a number of countries – such as Russia, Japan and the USA, for example – will experience an economic speed-up. In some European countries, too, the economic performance is expected to improve in the coming year – in Italy, Austria and Greece, for example. However, as this growth is only likely to be small and the prospects in many other EU countries look less rosy, the growth of gross domestic product (GDP) for all European countries is actually set to decrease to 1.25 percent in 2017 – down 0.25 percent on 2016. Even in Germany, there will be a noticeable slowdown in the economy.

The two main causes of the modest global outlook for 2017 are easy to identify: the decision by the United Kingdom to leave the EU has had a lasting impact on economic uncertainty since June, while Donald Trump’s election as the 45th President of the United States has increased global uncertainty even further.

Brexit. The majority of studies show that the consequences – both for the United Kingdom as well as for the EU and individual trade partners – are expected to be significant. In Great Britain itself, the high degree of uncertainty caused by its decision to withdraw from the bloc is likely to put a considerable brake on economic growth:

This year the United Kingdom’s economic growth amounts to 2 percent; in 2017, however, the growth rate is predicted to fall to 1 percent.

In Germany, an important trade partner for Great Britain, the prospect of the forthcoming Brexit is already curbing growth by an estimated 0.25 percent before the negotiations even have got under way. Further depressing effects are likely to follow as soon as exit plans become more concrete.

The Trump effect. Even before the American presidential election, global trade became less dynamic; in America itself, private investors in particular had been holding back for months:

In the USA private investment was already declining at the start of 2016, and by the third quarter of the year they were 2.7 percent lower than in 2015.

Following Donald Trump’s election, it is far from clear in which direction the USA is heading in terms of foreign and economic policy. Thus, GDP growth of the world’s largest economy will not exceed 1.5 percent this year. In the coming year it is likely to amount to just 2 percent. How the financial markets will develop if Trump really does embark on a path of economic isolation is difficult to foresee.

In the face of all these imponderables, it is up to Europe as a political entity to act as a stabilising force and create an investment-friendly climate. To this end Europeans have to:

  • make progress in reducing state public debts,
  • maintain freedom of movement within Europe,
  • safeguard the capacity for action in trade policy, in particular by means of a speedy ratification of CETA and further efforts to conclude the TTIP agreement,
  • and promote reforms in the Southern European crisis countries.

It is critical that Europe is becoming more significant and, in this environment of global uncertainty, needs to act as a political entity.

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