The global economy looks set to carry much of its recent momentum into 2018, although growth is likely to be slower than what we saw in mid-2017. What's behind this growth?
By Nikolaj Schmidt and Alan Levenson
The global economy looks set to carry much of its recent momentum into 2018, although growth is likely to be slower than what we saw in mid-2017.
Trends such as healthier government finances among the more indebted euro-area countries and improving trade in the emerging markets have put the global economy on a more stable footing, which should help it to withstand any withdrawal of loose monetary policy.
All major economies accelerated in unison for the first time in almost a decade. Growth among commodity exporters, Brazil, Mexico and Russia led the way, while Japan and major developed economies in Europe also performed well. Although growth may slow in 2018, we expect the global economy to carry much of its momentum into the new year.
The strong showing in recent months has been due largely to a recovery in companies’ investment in capacity, particularly among energy and metals-related companies (Figure 1). Global trade has also accelerated, suggesting a broad-based improvement.
European economic growth appears more sustainable, with unemployment down and household incomes up. As consumers are beginning to spend again, this could suggest the beginning of a longer recovery.
Recent political reforms are beginning to bear fruit. Unemployment has fallen to a 23-year low and the number of jobs per applicant has reached its highest level since 1974. While broad-based wage increases remain modest, workers are moving to higher-paid positions, especially among part-time workers.
We expect China’s growth rate to slow in 2018, but we are optimistic that its leaders can keep the economy expanding at a pace that does not threaten growth for its trading partners. The country’s leaders have begun focusing on boosting quality of life, in part by reducing pollution. Even as they pursue these new goals, Chinese authorities are likely to step in as needed to help keep their promise of doubling incomes over the current decade.
One risk to the Chinese growth story would be if the government tightens financial sector regulation too aggressively, thereby strangling credit growth. However, they have been good at avoiding this trap thus far, and are highly motivated to keep the financial system on a sound footing.
The main issue facing markets in 2018 will be the unwinding of Quantitative Easing (QE) by global central banks.
We don’t believe this should necessarily pose a significant danger to the global economy. Loose central bank policy will likely remain through 2018, if at a reduced level. Furthermore, any withdrawal will come against the backdrop of a much more balanced global economy.
The US economy appears to be settling back into the moderate growth path that it has followed over the past several years, fed by moderate gains in nominal wages and the recent pickup in company investment. Similarly, inflation appears to be stalled at around 2%, which should keep the Federal Reserve on its current gradual-tightening path.
The economy seems to have shaken off the impact of the 2017 season’s hurricanes, due in part to an increase in net exports. Indeed, car sales spiked in September as consumers replaced cars flooded during the storms, although they dipped into their savings to do so. Consumer spending should also get a boost from hurricane-related insurance pay outs. The hurricanes likewise seemed to have little lasting impact on overall employment. We expect the unemployment rate to continue to fall, perhaps going below its multi-decade low in the late 1990s. However, we don’t necessarily believe this will lead to substantially higher wages or inflation.
Productivity growth remains muted, while most areas of the economy (outside housing) are not experiencing pricing pressures. Indeed, durable goods prices are actually falling on the back of global competition and automation. As a result, inflation may not reach the Fed’s 2% target. Nevertheless, the Fed will continue to raise rates, tolerating the low inflation, at least until unemployment stabilises. Fed officials are aware that abnormally low long-term interest rates are fostering inflated asset prices and may pose risks to financial stability if they are sustained.
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