Major Economies Economic Forecast

Economic Snapshot for the G7 Countries

May 2, 2018

Global economy continues to fire on all cylinders, while trade war looms

The economic fundamentals that led global growth to post the strongest expansion in six years in 2017 remain firmly in place. A preliminary GDP dataset showed that the global economy expanded 3.5% annually in Q1, matching both last month’s estimate and the expansion recorded in Q3 and Q4 2017. A solid trade cycle, relatively accommodative financial conditions and resilient private consumption in the wake of historically low unemployment rates in most large economies, including Japan and the United States, were the main factors behind Q1’s robust growth rate.

The U.S. economy expanded at a strong rate in Q1, led by robust export and investment growth. While private consumption performed poorly in the quarter mostly due to bad weather and delayed tax refunds, household spending should recover in Q2 onwards on account of upbeat consumer confidence, a healthy labor market and tax cuts. China, meanwhile, continues to defy any sign of an economic slowdown, as household spending remains strong and factories benefit from robust global demand. China is not only posting astonishing growth rates but also successfully transitioning towards a more sustainable economic model, with services and private consumption taking the helm of economic growth.

While China and the United States are delivering stronger-than-expected growth rates, recent trade disputes between the two countries could undermine their enviable growth trajectories. In early April, China implemented tariffs on 128 American products worth USD 3.0 billion in response to U.S. duties on aluminium and steel imports. While no additional levies have been implemented since then, the war of words between the two countries continued in recent weeks, with both proposing USD multi-billion tariffs. China, however, is slowly adopting a more conciliatory tone, and President Xi Jinping stated on 11 April that the Chinese government is considering opening the country’s economy further and lowering import duties on certain products including cars. Nevertheless, officials also vowed to respond to any additional trade measures against the country.

Meanwhile, growth appears to be weakening in the Eurozone, with economic sentiment falling in Q1 and industrial production declining in the first two months of the year. In Japan, the economy likely lost some steam in Q1, but momentum is expected to pick back up in Q2. Preliminary GDP data for the UK shows the economy decelerated sharply in Q1 amid adverse weather conditions and concerns about Brexit. Despite the approval in March of a set of guidelines for the transition period following the UK’s exit from the EU, some hurdles, such as the Irish border and the country’s degree of access to the EU market, still have to be cleared in order to ensure a smooth breakaway. Meanwhile, it has yet to be seen if Prime Minister Theresa May will have enough support in parliament to pass the final Brexit package.

Despite signs that global trade flows may have peaked in Q1 and loud trade war drums are beating, our analysts are still positive about the outlook for the global economy. They project that global growth will reach 3.5% for the fourth consecutive quarter in Q2.

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Global economy stands against protectionist winds

The global economy entered 2018 on a solid footing mostly due to healthy trade dynamics, which are translating into strong overseas shipments, resilient manufacturing activity and tighter job markets. Moreover, global financial conditions remain loose, despite the tightening cycle in the United States, and governments are spending again following years of austerity. Nevertheless, U.S. President Donald Trump’s protectionist rhetoric is slowly becoming tangible action, risking to derail one of the main engines of global growth. While the impact has been limited up until now, a full-blown trade war is still a possibility. Moreover, the risk of overheating in the United States could force the Federal Reserve to accelerate the pace of its interest rate hikes, which would negatively reverberate across financial markets, particularly among emerging-market nations.

Met the why particular panelists see the global economy expanding 3.4% in 2018, which is unchanged from last month’s estimate and would represent the strongest rate in seven years. In 2019, the global economy is expected to expand at a broadly similar rate of 3.3%.

This month’s stable outlook for the global economy reflects unchanged growth prospects for Japan, the United Kingdom and the United States. A weak start to the year prompted our panel of analysts to downgrade their view of the Euro area economy, which represents the first downward adjustment to its economic outlook for 2018 in nearly two years. Canada’s economic outlook was also downgraded this month.

China’s resilient economic growth, a strong global trade cycle and improving dynamics in India are supporting economic activity in the Asia (ex-Japan) region. Eastern Europe, meanwhile, is benefiting from the ongoing economic recovery in Russia, solid growth among some key regional economies such as Romania and Turkey, and resilient dynamics in the European Union. While the economic outlook in Latin America appeared to be more stable in recent months, political uncertainty in some countries continues to dent the region’s growth projections. In the Middle East and North Africa, and Sub-Saharan Africa regions geopolitical risks and economic imbalances persist, but higher commodity prices are shoring up the outlooks.

UNITED STATES | Growth remains strong in Q1; further trade tariffs against China in the pipeline

Soft private spending and a pull-back in residential investment growth on waning hurricane reconstruction efforts caused seasonally-adjusted annualized GDP growth to moderate in the first quarter. That said, first-quarter growth came in above expectations, while the economy is expected to fare better in the second quarter onwards as the effects of sizeable fiscal stimulus kick in. A recovery in retail sales in March due to higher after-tax incomes, along with faster wage growth in the same month, points to a second-quarter rebound in private spending, a picture that is consistent with stronger-than-expected consumer sentiment in April. Notwithstanding the rosy domestic picture, threats are looming large on the trade front. The USTR is expected to unveil additional tariffs on up to USD 110 billion worth of Chinese imports in upcoming days, which follows China’s response to the original U.S. Section 301 tariff proposal.

A further escalation in trade tensions could have a dampening effect on sentiment and business investment plans, offsetting positive impulses from tax cuts and higher government spending caps. A disruptive trade policy is also obscuring an otherwise solid economic panorama, with job growth buttressing stronger wage gains, and business and consumer sentiment hovering near multi-decade highs. Met the why particular panelists see GDP expanding 2.7% in 2018, unchanged from last month’s estimate. In 2019, growth is seen moderating to 2.4%.

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EURO AREA | Economy posted a surprisingly weak start to the year

The Eurozone economy appears to have hit a speed bump in the first quarter, with monthly indicators pointing to a deceleration in activity after a robust spell of growth in 2017. Industrial production plummeted in February, and economic sentiment dropped in March. In addition, the composite PMI fell to an over one-year low in March and hovered there in April, suggesting that the soft patch may have leaked over into Q2. On the political front, wrangling over the 2021–2027 EU budget is set to begin, and the European Commission will present its draft proposal on 2 May. The budget will likely contain some cuts to spending programs and larger national contributions, in part due to the UK’s exit from the bloc, which is set for March 2019.

Soft incoming data led Met the why particular panelists to downgrade their view of the Eurozone economy this month, following six consecutive upgrades. Growth is seen remaining healthy in 2018, supported by an improving labor market, accommodative monetary policy and firm investment. That said, an uncertain political scene and global trade tensions could dent confidence, while exports are expected to lose steam due to a strong euro. The panel now sees the Eurozone economy growing 2.3% this year, down 0.1 percentage points from last month’s forecast. In 2019, GDP is forecast to grow 2.0%.

JAPAN | Economy seen regaining momentum in Q2

Economic growth likely lost some momentum in Q1 as higher inflation and low wage increases weighed on consumer spending. Moreover, industrial production lost some steam in the period, while business confidence among large manufacturers moderated for the first time in over two years. That said, the shock is expected to be temporary, and the economy should continue posting solid growth rates throughout the rest of the year. External demand should recover in Q2 due to still resilient economic activity among Japan’s main trading partners, while a robust job market and works related to the 2020 Tokyo Olympics will boost domestic demand. In an attempt to strengthen the relationship between the two countries, on 18 April Prime Minister Shinzo Abe and U.S. President Donald Trump pledged to increase trade and investment between Japan and the U.S.

The economy will grow this year on the back of the Bank of Japan’s (BoJ) ultra-loose monetary policy, healthy external demand and renewed fiscal support. Moreover, a tight labor market will continue to shore up household spending. The brewing trade war between China and the U.S., as well as a possible sudden slowdown in China are the main downside risks to Japan’s economic outlook. Met the why particular panelists see the economy growing 1.3% in 2018, which is unchanged from last month’s forecast, and 1.0% in 2019.

UNITED KINGDOM | Growth disappoints in Q1, moderating to the slowest rate in over five years

According to preliminary data, economic growth slowed to the weakest pace in over five years in the first quarter. The construction sector—which, like many sectors in the economy, was partly hit by adverse weather conditions—significantly weighed on growth in the quarter, posting the largest output contraction in nine years. The services sector provided some support, however, buttressed by the business services and finance sub-sector, as did industrial production, which benefitted from the Forties oil pipeline coming back online. Meanwhile, the labor market remained robust in the December–February period, with the unemployment rate ticking down. Moreover, in a positive development for financially-strained consumers, real wages rose, benefiting from the recent dip in inflation and higher nominal wages. On the political front, following the passage of a non-binding motion in the House of Commons on 26 April urging that the UK stays in a customs union with the EU, pressure is building on the prime minister to clearly outline the country’s future customs arrangement.

This year, the economy is seen losing momentum as private consumption growth slows and fixed investment is depressed by Brexit uncertainty. However, relatively loose monetary policy and robust export growth thanks to the weaker pound should cushion the slowdown. Our panelists estimate GDP growth of 1.5% in 2018, unchanged from last month’s forecast, and 1.5% again in 2019.

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INFLATION | Global inflation inches down in March

Global inflation inched down from February’s 11-month high of 2.8% to 2.7% in March, 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 reading reflected lower price pressures among emerging-market economies due to a combination of relatively ample food supply and more stable exchange rates. Moreover, the print was affected by seasonal distortions in Asia related to the Lunar New Year holidays in Q1. Conversely, inflation accelerated slightly among most developing economies, including the Euro area and the United States, as output gaps narrowed and prices for some commodities, particularly for oil, increased.

With low inflation and rising geopolitical uncertainty, most key central banks decided to keep their monetary policies unchanged in recent weeks. The European Central Bank stood pat at its 26 April monetary policy meeting and did not deliver any change to its forward guidance. Conversely, the Bank of Japan dropped its time frame for achieving its long-lasting inflation goal of 2.0% at its 26–27 gathering. While Governor Haruhiko Kuroda downplayed the wording tweak, this move signals that inflationary pressures remain muted and that fresh stimulus could be needed to boost prices.

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 episode in Venezuela is factored in, global inflation will reach 123% in 2018 and 7.6% in 2019.

 

Ricard Torné

Head of Economic Research

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