World Economics Monthly - Outlook
More US rate rises likely in 2017
The December decision of the Federal Reserve (Fed) to raise interest rates for only the second time in a decade (by 25 basis points, to 0.75%, following a similar increase in December 2015) indicates growing confidence that the US economy is normalising. With the rate of unemployment now well below 5.0%, consumer sentiment buoyant and medium-term GDP growth set to be boosted by fiscal stimulus, the upside risks to inflation are mounting. As a result, at least two further 25-basis-point hikes in the funds rate are anticipated for 2017.
Rising commodity prices set to feed inflation
Mounting inflationary pressure reinforces the likelihood of monetary policy tightening. In the USA, the price of a gallon of gasoline rose by almost a third (32.2%) between the seven-year low it plumbed to in February 2016 and late December (from US$1.83 to US$2.42), although this has yet to have any discernible impact on consumer confidence. The annual rate of growth in US producer prices has accelerated sharply over recent months, from -0.2% in July to a 24-month high of 1.3% during November. According to the IMFs Indices of Primary Commodities, the average global price of all primary commodities (edibles, industrial inputs and energy) rose by more than a quarter (28.2%) during the first 11 months of 2016.
China hints it may sacrifice growth to facilitate structural reform
The Chinese government has indicated that it will attempt to rein in runaway growth in residential property prices and attempt to counterbalance this by increasing investment in infrastructure next year. However, a statement released after a meeting of the Communist Partys Politburo on December 12th indicated that aggressive stimulus measures are off the table, giving a green light to plans to reduce overcapacity in the primary sector.