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Home » Challenges of the World Economy in 2017 – Economics Economics Challenges

Challenges of the World Economy in 2017 – Economics Economics Challenges

By Richard Daniels Reading Time: 4 mins
Updated February 7, 2017

The year 2016 has been characterized by its economic changes, but what awaits us in this New Year? We analyzed the five major challenges facing the economy worldwide in 2017.

Challenges of the World Economy in 2017

Since 2008, one of the characteristics that have defined the evolution of the world economy is the growth of debt. The main cause is the strong impact of the crisis on the economy, and the widespread conviction that the authorities should take action in this regard.

The failure of the policies of fiscal expansion was necessary, how could it be otherwise, resorting to monetary policy. That’s what has mainly occurred in the United States, Europe and Japan, where central banks have bet decidedly increase the monetary base to revive growth.

The truth is that these policies seem to have played a decisive role in the recovery, but they have also helped create a problem of major importance: the growth of debt. Naturally, the largest financing facilities have generated an increase in liabilities (whether lending to investors private or buying debt directly from central banks), with the addition that the interest rates on minimum may not reflect the real risks of the traded assets. In other words, monetary expansions too aggressive to flood markets liquidity can artificially lower rates and distort the relative profitability -risk investment, allocating resources to inefficient sectors. A clear example is public finances in the EU because of purchases of government bonds by the ECB governments have less incentive to curb public spending, as its fiscal irresponsibility no impact on its cost of funding.

It is true that in some heavily indebted countries (such as Spain and Ireland) the private sector has carried out a hard deleveraging, but does not appear that the public sector has done the same. In fact, public debt in the Eurozone rose from 64.9% of GDP in 2007 to 91.4% in 2016 (representing an average annual increase of 2.65%), while the average annual growth of the Economy is only 0.6%. This means that the current economic model needs to place 4.42 € Public debt per euro generated GDP. At the moment this has strengthened the recovery, but it is a model that is difficult to sustain in the long term, and possibly should be rethought.

Inflation Returns

The last months of 2016 have been characterized, among other things, by a slight rise in inflation, after several years of deflationary threat. In this sense, the great challenge of the global economy could keep rising prices at levels that are not harmful for growth and take advantage of the change cycle to consolidate recovery. In the United States, for example, it is expected that the authorities can address the problem with monetary policy more restrictive, since its economy approaches full employment , but what will happen with Europe, not yet recovered from the crisis and dependent on stimuli ECB?

The return of inflation could have multiple effects, from the energy market through purchasing power of citizens. Therefore, it is expected that in 2017 measures such as the reform of energy models or new processes of salary review will be taken.

Changes in the Production Model

Many of the changes that have taken place in 2016 foretell also allow reform of the production model in many countries. In the United States, for example, the protectionist turn of Trump before the competition Asian could encourage a greater role for the industry nationally. Something similar could happen in the UK if European imports begin to be replaced by British – make products, but this will also depend on other factors such as price stabilization pound.

Moreover, countries that have opted for devaluation (internal or external) to make its exports more competitive could be seriously affected when returning inflation, and should address a paradigm shift that allows them to compete through value added instead of following Doing it via prices. In these global environment where the digitization and automation of work grow a phenomenon in one way or another and affects all economies in the world.

Exhaustion of central banks and change of monetary cycle
As discussed earlier, the major world economies have opted for monetary expansion. One of the many effects of this measure is the thickening of the balance sheets of central banks, as well as deterioration in the quality thereof. In this sense, the BOJ has tripled its financial liability in just four years, while the ECB has on their balance sheets with a large volume of public debt of countries with serious fiscal deficit.
Moreover, the rise in interest rates in the US (while they remain low in Europe) could make even more complex the challenge of central banks in 2017, as they will have to act under different monetary cycles.

Reorder International trade Networks

The year 2016 has witnessed great political events that are having a direct impact on the economy. One of the clearest consequences is the shift in trade policy: it is an abandonment of projects of regional economic integration (such as Brexit and search for the EU, or reformulation of NAFTA to the US..) a new model based on a network of bilateral agreements. Given the failure of the creation of large free trade areas (such as the Transpacific Agreement or TTIP ), countries are now faced with the challenge of redefining how they want to relate to the rest of the world.
There are also other factors to take into account, such as the role of emerging countries in the world economy, oil price developments and a wide range of geopolitical risks. They increase the complexity of the landscape, but lead to one conclusion and 2016 it proved to be the year of big changes, 2017 promises to be the major challenge.

Author at Business Study Notes
Richard DanielsAuthor at Business Study Notes

Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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