China continues to suffer from considerable excess capacity in
industrial sectors, such as steel and coal, while its financial sector risks
have increased.
Russia
Russia is also slowly recovering from a deep recession. Although the economy contracted for its second consecutive year in 2016, headwinds are now receding thanks to a recovery in real wages,
rising oil prices and a related increase in oil production. The economy has also
Brazil
Brazil has had its share of hard times in recent years. After being among the fastest-growing economies in the world in 2010, it has more recently suffered its worst recession in a
century, evident in seven consecutive quarters of contraction. In turn, GDP fell an estimated 3.3% last year, leaving it on par with 2010 levels. Even worse, industrial production now stands where it did in 2004.
Fortunately, there are already tentative signs of a recovery. Inflation has peaked; the current account deficit has shrunk; and confidence indicators, while still weak, have stabilized. Of equal importance, the financial markets have welcomed a new government amid expectations that it will finally tackle Brazil’s fiscal problems and steer the economy out of recession.
But despite these promising green shoots, our base case does not call for a robust recovery in 2017. While the new administration is off to a promising start, it is facing resistance to key structural reforms while also navigating ongoing corruption probes. Moreover, the recovery in household consumption and business investment is likely to be hamstrung by continuing high real interest rates, a function of falling inflation and a simultaneously easing central bank. Meanwhile, fiscal policy will continue to tighten given a new spending cap and proposed pension reform measures. Finally, the modest commodity price gains we expect are unlikely to foster a meaningful rise in exports for Brazil. Accordingly, we expect a tepid recovery, with GDP expanding just 0-1% in 2017.
received support from both fiscal and
monetary policy, with the central bank cutting the policy rate by 100 basis points last year as inflation moderated. Still, the economy has likely suffered some permanent damage from the combination of depressed oil prices and Western sanctions, which have pushed down Russia’s long- run growth potential.
While the cyclical recovery should continue in 2017, it is apt to be measured. The government is planning to reduce the fiscal deficit by 1% of GDP this year, which will limit fiscal support. That said, elections in March 2018 could ultimately temper such fiscal prudence. Meanwhile, the central bank will likely deliver more rate cuts, but their size and pace will depend on the path of inflation, which could be stickier than anticipated.
Against this uncertain backdrop, we expect the Russian economy to return to modest growth in 2017, expanding 0.5-1.5%. While not our base case, growth could quicken if oil prices increase more than we expect or if sanctions are lifted.
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