Our Analytics 4 january — 15:53

Global economy's rise defeats crisis in Azerbaijan (Our analysis)



Recently, many analysts make a joke that until the Fire Rooster pecks, there is no harm in looking at what it has prepared for us. What will be for us the new year 2017? There are already a lot of conversations, speculations, expectations. Everyone is waiting for forecasts of analytical agencies.

Before turning to the merits of the forecasts for the new year 2017, let's note the main one concerning Azerbaijan. The projected rise in the world economy will also affect Azerbaijan. And now let's turn to what the world's leading think tanks think about this.

America: Leap forward

Let's note from the very start that if you look through the latest reports, the picture is quite optimistic. The global economy should continue to grow with a very good pace. It seems that another minus cycle for the global development has ended, and an era of pluses has started. However, the forecasts may still not come true: there are still many risks for the global GDP.

Recently, on the pages of the influential Washington Post, Jared Bernstein, a Senior Fellow at the Centre on Budget and Policy Priorities, compared the US economy eight years ago, when Obama began his first term, and today. The expert noted that the two situations are different from each other as night and day.

By the end of 2008, US GDP decreased by 8.2% on the annual basis: it was the biggest drop in half a century. Unemployment, which prior to the Great Recession of 2008-2009 was 5%, jumped to 10% by 2009, while the number of unemployed has increased from pre-crisis 7 million to 15 million people. Real estate prices have fallen on average by 30%, and the market value of securities by 57%. American families have lost more than 20% of their fortune. Middle-class incomes in 2008 fell at the fastest pace since 1967. US national debt, which in 2008 accounted for 66% of GDP, by the end of 2012 increased to 103% of GDP. That was the beginning of the Obama presidency.

Obama has provided US economic upturn

Now let's see, what how will begin his presidency Trump. According to preliminary estimates of the Federal Reserve System, in 2016 the country's GDP grew by 1.9% and in 2017 will grow by 2.1%. Unemployment fell to 4.6%, the lowest figure in the last nine years. Many consecutive months new jobs are created at a high rate. There is almost full employment, so the Fed is going to consistently raise its discount rate in order to prevent overheating of the economy and lack of working force. Real incomes of the middle-class are growing. Fully restored is the estate market. Stock quotes are growing by leaps and bounds, increasing the market value of companies. The first economy of the world meets the new year 2017 in good shape.

Everybody will pull through

Not bad is the situation in the rest of the world. According to the forecast of the Organisation for Economic Cooperation and Development, in the future, the GDP of industrially developed OECD member-countries will increase by 2%, and the economy of developing countries, non-OECD members, will grow by 4.5%.

The Eurozone economy in 2016, according to the same estimates, will grow by 1.5%, and GDP growth will continue over the next two years, at about the same pace. Not much, but still not bad for a region with a prolonged recession in the recent past. In 2017, inflation will gradually increase and unemployment decrease, both very necessary for Europe.

The second largest economy in the world, China is also more or less successfully overcoming the difficulties. In 2016 there was a collapse of the Chinese securities: on the Shanghai Stock Exchange quotations collapsed by 20% in less than two weeks. From China the ripples went to all stock exchanges of the world; downhill went the prices of raw materials: oil, coal, iron ore...

However, the Chinese authorities were able to quickly bring the situation under control by pumping into the economy huge funds: only in the first half year, the infusions were $2.7 billion, equivalent to 35% of China's GDP. Yuan depreciated by 8% per year, but it could have been worse. The Chinese currency has been included in the prestigious basket of reserve currencies by the International Monetary Fund. Experts believe that the growth of China's GDP in 2017 will amount to 6.5-6.7%. This, of course, is a slowdown compared to what it used to be a few years ago, but by world standards it is a good growth.

The most rapidly growing in recent years economy of the world, India in the past year held a so-called demonetisation: withdrawn from circulation were the largest denomination of 1000 and 500 rupees. This will have a braking effect on the Indian economy, experts predict, but in 2017 it will still grow rapidly, in the range of 7 to 7.5%.

In general, the international rating agency Fitch Ratings expects an increase of the growth rate of global GDP next year to 2.9% compared with 2.5% in 2016.

At the same time, the agency experts warn that next year the global economy will face elevated political risks and uncertainty. The main reasons for this are the unexpected victory of Donald Trump in the US presidential election and the equally unexpected result of the vote to withdraw Britain from the European Union (Brexit) in June. The long-term impact of these factors on the world economic processes will manifest itself in 2017.

What awaits Russia and Azerbaijan?

This question is waiting for a separate examination in view of the forecast indicated at the beginning of this commentary. So, what is it? The expected economic recovery, an unexpected jump, or planned growth?

For all the specifics and differences between the scale of the economies of the two countries, the situation with the trends in their development is unfolding very much alike. We've lived through a difficult year that turned with recession for both Moscow and Baku. The main reason for what happened is clear: the price of oil remains relatively low, and our economies are highly dependent on hydrocarbon exports.

As pointed out by international think tanks, there are other artificial reasons for the downturn. Thus, Russia continues to be under the influence of the international sanctions imposed on it because of the events around Ukraine and Crimea. A main reason for deceleration of the dynamics of non-oil sector, the IMF experts have called a sharp decline in production in the construction sector, by a quarter compared with the last year.

However, the views for 2017 in both countries are good. International analysts unanimously predict our growth, albeit not very significant, within 1-1.5% of GDP. First of all, this is due to the favourable forecasts for the oil market, where this commodity should rise in price in the next year, at least to the level of 60-65 dollars per barrel. And if that happens, life-giving influx of petrodollars to Moscow and Baku will increase positive impact on economic results. In particular, what is important for the population of our countries, in 2017 inflation should slow down: in Russia from 6 to 4%, in Azerbaijan from 10 to 8.5%.

In general, it turns out that from an economic point of view, there is reason to celebrate the New Year with optimism. Only little remains: the positive predictions should come true in the year of the Fire Rooster, and numerous risk should remain on paper.

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