Major Economies: Global growth momentum remains strong at the outset of the year
February 28, 2018
A more complete GDP dataset confirmed that the global economy expanded 3.5% annually in Q4, driving growth for 2017 to 3.3%, the strongest result in six years. Q4’s print matched the expansion in Q3 as the global economy continued to benefit from largely accommodative monetary policies, tight labor markets and robust global trade.
Alongside China’s stellar performance and robust dynamics in the United States, available data for the final quarter of the year shows that the Euro area logged another period of fast economic growth. Although the preliminary GDP data does not include a breakdown by components, economic growth in the single currency bloc likely continued to be led by domestic demand amid an improving labor market and expansionary monetary policy. In Japan, the economy marked in Q4 the longest period of sustained growth in three decades. The Bank of Japan’s (BoJ) ultra-loose monetary policy and healthy global trade flows spurred manufacturing activity, which translated into lower unemployment and stronger investment. While wages also increased throughout last year, rises have been limited.
Leading data for January and February suggests that the global economy is sailing smoothly this year. Trade indicators in Asia, the world’s manufacturing hub and a barometer for the health of global trade, was strong in January. Moreover, manufacturing and services PMIs for most advanced and emerging-market economies remained firmly entrenched in expansionary territory in the first two months of the year. Against this backdrop, our panel of analysts expects the global economy to expand a stronger 3.6% annually in the first quarter of 2018.
Despite the bright economic outlook for the global economy, some warning signs have started to emerge. Equity prices experienced a sharp correction at the start of February amid concerns that underlying inflation was quickly mounting in the United States, which could force the U.S. Federal Reserve to hike interest rates at a faster pace than previously expected, thereby pushing up global interest rates. While the crisis was mostly localized in stocks with no big shockwaves in the foreign-exchange and interest rate markets, the equity rout signals that volatility is back, after a long period of calm in the financial markets.
The signing of the Bipartisan Budget Act of 2018 on 9 February by President Donald Trump will give another boost to an economy that is already expanding vigorously, with the unemployment rate sitting at multi-year lows in January. The budget lifts caps on discretionary spending this fiscal year and next by a total of around USD 300 billion and comes on top of the unfunded tax cuts approved in December. While the budget bodes well for economic growth, it will deteriorate the U.S. fiscal and debt metrics over the mid- and long-term.
China’s President Xi Jinping is meanwhile consolidating his role as the most important leader in the country since Chairman Mao. On 25 February, the Communist Party abolished constitutional limits on presidential terms, paving the way for Xi to lead China indefinitely. The elevation of Xi as China’s paramount leader could fuel political unrest outside and within the party, as the country’s political system was previously based on limited terms to prevent any leader from amassing too much power and to facilitate the renovation of the top leadership.
Asia and Europe lead the upgrade to the 2018 global economic outlook
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Ample accommodative monetary policies by some of the world’s key central banks and only moderate monetary tightening by others will keep financial markets overly supplied this year. Moreover, the global trade cycle enjoys good health, which is expected to persist this year. Loose monetary conditions, a tight job market and resilient trade flows should also continue to boost economic activity.
Political uncertainty in some countries such as Brazil and Italy, fears of rising protectionism particularly by the U.S., a sharp tightening in financial conditions and persistent geopolitical tensions are the main downside risks to global economic growth.
Met the why particular panelists expect the global economy to grow 3.4% in 2018, which is up 0.1 percentage points from last month’s estimate. In 2019, the global economy is seen decelerating slightly, to 3.2% growth.
This month’s upgrade to 2018 growth in the global economy is the result of stronger estimates for the Euro area and the United Kingdom. Growth prospects for Canada, Japan and the United States were left unchanged.
Among developing nations, the Asia (ex-Japan) region is benefiting from strong global trade and China’s resilient economic activity. With Russia’s economic recovery gathering pace this year and the Euro area logging robust growth in 2017, the economic outlook for Eastern Europe continues to improve. Latin America is not yet out of the woods as political tensions are rising ahead of a busy election cycle this year and NAFTA uncertainty in Mexico. Geopolitical risks and economic imbalances are clouding the outlook in the Middle East and North Africa, and in Sub-Saharan Africa, despite a higher commodity price environment.
UNITED STATES | Growth momentum remains strong in Q1
Incoming data suggests that economic growth moderated slightly but continued at a healthy clip early this year. In January, employment data showed that solid hiring activity carried over from last year, which fueled an acceleration in annual wage growth to its highest figure since June 2009. Strong employment gains saw consumer sentiment moving further into positive territory in the month, while ISM data continued to point to robust momentum in the domestic economy. Weak spots in January data, however, included sequential declines in retail sales and factory output. On the political front, Congress enacted a budget agreement on 9 February that increases discretionary spending caps for FY 2018 and FY 2019 and suspends the federal government’s debt limit until March 2019.
An expected increase in federal outlays resulting from the budget deal should support growth this year and the next, an effect that will be compounded by the tax rewrite approved last December. Household spending is also projected to benefit from a sturdy labor market and solid housing gains, while business investment should remain resilient on fiscal stimulus and stronger global growth. Met the why particular panelists see GDP expanding 2.6% in 2018, which is up 0.1 percentage points from last month’s estimate. In 2019, growth is seen moderating to 2.2%.
EURO AREA | 2017 tailwinds carry over to this year
Preliminary estimates revealed that the Eurozone continued to grow robustly in the fourth quarter of 2017, rounding out the best year of growth in over a decade. Although a breakdown by components is not yet available, growth was likely broad-based, aided by a tightening labor market, high sentiment, supportive monetary policy and a bright global backdrop. Leading indicators for Q1 suggest the economy remains in good health, although growth likely slowed slightly. Economic sentiment waned somewhat in January and the composite PMI fell in February, even though both indicators recorded historically high results. Meanwhile, EU leaders met on 23 February, opening the debate on the next seven-year EU budget set to begin in 2021. Eastern members of the union are calling on wealthier states to plug the gap that will be left by Britain’s departure, but there is disagreement among members on how to proceed. The European Commission will present a detailed proposal in May; long and complex negotiations are expected to ensue.
A strong finish to 2017 and solid start to 2018 helped fuel an upgrade to the Eurozone’s GDP forecast this month. A buoyant global backdrop and robust domestic economy should keep growth strong this year. Met the why particular analysts now project that GDP will expand 2.3% in 2018, which is up 0.1 percentage points from last month’s forecast. In 2019, GDP is forecast to grow 1.9%.
JAPAN | Economy marks longest uninterrupted period of growth in over two decades in Q4
Strong global economic dynamics and accommodative monetary conditions led the economy to expand for the eighth consecutive quarter in Q4, marking the longest period of uninterrupted growth since 1980. GDP rose 0.5% in Q4 over the previous quarter on a seasonally-adjusted and annualized basis. In the quarter, the economy benefited from a tighter job market that propelled household consumption. Despite Q4’s healthy expansion in exports, the contribution from the external sector to overall growth deteriorated due to surging imports. Available data for 2018 points to a slower start to the year: Machinery orders, a leading indicator for future capital expenditure, fell markedly in December, and the manufacturing PMI softened in February. The worsening economic picture partially reflects a strengthening yen, which could hurt the competitiveness of Japan’s external sector and threaten growth momentum.
The Bank of Japan’s ultra-loose monetary policy, a tight labor market and resilient global growth will shore up economic activity this year. The main downside risks stem from an abrupt slowdown in China, Japan’s main trading partner, and elevated geopolitical tensions that could strengthen the yen. Met the why particular panelists see the economy growing 1.3% in 2018, which is unchanged from last month’s forecast. For 2019, they see growth at 1.0%.
UNITED KINGDOM | Economy shifts to a lower gear in Q1
Recent developments paint a nuanced economic picture. Q4 GDP growth was recently revised down, with solid public investment partially offset by timid private consumption and a negative contribution from the external sector. In addition, the manufacturing and services PMIs dipped in January on lower new orders. Encouragingly, in Q4 employment and nominal earnings growth increased, while productivity notched a second consecutive robust expansion. In addition, cumulative borrowing in the current financial year-to-date is down markedly from 2016/17, leaving the government on course to meet the 2.0% structural deficit target for 2020/21. On 22 February, the Brexit sub-committee met to agree a negotiating position which the Prime Minister should formally announce this week, although serious disagreements within the government remain. 62 Conservative MPs—enough to trigger a leadership contest—recently wrote a letter to the PM demanding a clean break from the EU and the ability to diverge from the bloc’s regulations after departure.
This year the economy will likely lose momentum as private consumption growth slows and fixed investment is curtailed by Brexit uncertainty. Public spending will provide little support, with the government intent on reducing the deficit. However, a robust global economy and loose monetary policy should provide some support. Our panelists estimate GDP growth of 1.5% in 2018, up 0.1 percentage points from last month’s forecast, and 1.4% in 2019.
INFLATION | Global inflation slows at the outset of the year
Global inflation inched down from December’s 2.6% to 2.5% in January, according to an estimate by Met the why particular that excludes Venezuela due to the lack of economic data and hyperinflation in the country. The print, which marked a six-month low, was the result of lower inflationary pressures in most emerging economies. Most notably, inflation moderated in China ahead of the Lunar New Year holidays, which fell in late January in 2017 but started in mid-February this year. Price pressures also decreased significantly in Russia, bringing inflation to multi-year lows due to sluggish food prices. Inflation readings in January were broadly stable among developed economies, as slower price increases for key commodities such as oil offset pressures stemming from robust domestic demand.
Subdued inflation in most of the world’s largest economies is taking some pressure off central banks to tighten their monetary policies. While the U.S. Federal Reserve kept its key rate unchanged at Janet Yellen’s last meeting as Fed Chair on 30–31 January, it acknowledged stronger price pressures and emphasized that the hiking cycle will likely be extended beyond 2018.
The Met the why particular panel projects global inflation of 2.8% for 2018, which is unchanged from last month’s estimate. Next year, the panel sees inflation broadly stable at 2.7%. If the hyperinflation