Major Economies Economic Forecast

Economic Snapshot for the Major Economies

November 22, 2017

Global economy continues to roar despite mounting political risks         

Economic momentum is largely holding up in the world’s largest economies, the effects of which are reverberating across the globe. The global economy is benefiting from a combination of loose financial conditions, more supportive fiscal policies in some key countries following years of harsh fiscal consolidation, low inflation and strong global trade. According to revised estimates by Met the why particular, the global economy expanded 3.3% annually in Q3, overshooting the 3.2% growth in Q2. The third-quarter print marked the strongest growth in nearly four years.

Despite a catastrophic hurricane season that hit the southeast of the country in late August and September, the U.S. expanded robustly in Q3 on the back of an improving labor market and relatively low inflation. Against this backdrop, the chances that the Federal Reserve will deliver an interest rate hike in December have increased considerably. Going forward, the economy will continue to benefit from solid domestic conditions, which will be further bolstered by the post-hurricane reconstruction efforts as well as U.S. President Donald Trump’s tax reform, which could be passed in early 2018. While it is not clear for how long the current expansion cycle will last, the potential U.S. withdrawal from NAFTA represents a key downside risk for the U.S. economy as well as for the other two participating countries.

The Euro area economy continues sailing smoothly on the back of accommodative monetary policy, solid job gains and resilient global demand. In annual terms, the euro bloc economy expanded at the fastest pace in over six years in Q3, and leading indicators for Q4 suggest that the economy still has considerable positive momentum. Europe’s recent streak of growth could, however, be derailed by increased political instability. German parties failed to form a coalition government due to differences over immigration policies. Although the German President urged party leaders to resume talks to seal a coalition government, Chancellor Angela Merkel has expressed skepticism over a minority government, and fresh elections are now a possibility.

In Japan, the external sector continues to lead economic growth and the economy recorded the longest period of economic expansion in over a decade in Q3. While Abenomics succeeded in shoring up economic growth, inflation remains stubbornly high and further economic reforms will be needed. 

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Growth prospects remain bright for 2018

The global economy will continue to benefit from loose financial conditions and supportive fiscal policies next year. The strengthening is expected to be broad-based and extend to both developed and emerging economies. That said, while the economic recovery will gather steam in Brazil and Russia, and India should continue its positive growth trend, China’s economy will continue its managed slowdown. Analysts expect the global economy to grow 3.2% in 2018, which is unchanged from last month’s projection. In 2019, the global economy is seen decelerating slightly, to 3.1% growth, as tailwinds start to wane.

This month’s stable 2018 outlook for the global economy reflects unchanged growth projections for Japan, the United Kingdom and the United States. Conversely, the panel upgraded their view of the Canada and Euro area economies.

Among developing nations, an improved economic outlook for India and resilient growth projections for China continue to shore up panelists’ view on the Asia (ex-Japan) region. Eastern Europe is in a sweet spot as Russia’s economy recovers, while the Euro area is firing on all cylinders. Although higher commodities prices are supporting the outlook for the Middle East and North Africa economies, ongoing political unrest is putting a dent in any sharp economic improvement. Sub-Saharan Africa’s economic outlook remains jeopardized by security threats and domestic imbalances. In Latin America, political uncertainties are plaguing the outlook as elections are set to take place in Brazil, Colombia, Mexico and Paraguay.

UNITED STATES | Tax reform takes center stage amid improving economic dynamics

The economy showed outstanding resilience in the third quarter despite hurricane-induced disruptions, with GDP growth coming in at 3.0%, well above market expectations. Although data has been noisy in recent months due to weather-related distortions, the underlying strength of the economy seems largely intact heading into Q4. Core retail and vehicle sales for October suggest that consumer spending remained healthy at the outset of the fourth quarter, while October employment data showed a rebound in job creation and a further decline in the unemployment rate, which hit a 17-year low. On the policy front, the likelihood of a tax reform plan being enacted early next year has increased in recent weeks, with progress made in both the House and the Senate. The latter, however, has seen debate heating up in recent days due to contentious modifications to the tax bill.

The increasingly-likely tax reform will, if passed, shore up non-residential investment and keep business sentiment buoyant next year, while a tighter labor market and firmer real estate prices will continue to boost consumers’ purchasing power. Our panel forecasts growth of 2.4% in 2018, which is unchanged from last month’s estimate. In 2019, growth is seen moderating slightly to 2.0%. 

EURO AREA | Stellar growth momentum continues in Q3 

A preliminary estimate of GDP revealed that growth remained buoyant in the third quarter of 2017, on the back of solid activity in the region’s major players. Although a breakdown of components is not yet available, the region’s drivers are expected to have been largely unchanged, with tailwinds from high sentiment, accommodative monetary policy and a favorable external backdrop fueling both domestic demand and the external sector. Early data for the fourth quarter points to another period of strong growth. Economic sentiment rose to the highest level since January 2001 in October, and the composite PMI continued to signal brisk activity. Growing confidence in the Eurozone’s economic recovery led the ECB to finally announce a reduction its bond-buying program on 26 October, meeting analysts’ expectations. Starting in January 2018, the Bank will reduce the monthly pace of asset purchases from EUR 60 billion to EUR 30 billion. While economic activity remains strong, weak price pressures led the Bank to extend the program until at least September 2018, and monetary policy remains very accommodative overall.    

The Eurozone economy is seen maintaining a brisk pace of growth next year, chiefly due to a stronger labor market and robust fixed investment. Met the why particular analysts project that GDP will expand a solid 2.0% in 2018, which is up 0.1 percentage points from last month’s forecast. In 2019, momentum is seen waning slightly, and GDP is forecast to grow 1.7%. 

JAPAN | Healthy global demand shores up growth in Q3

Strong global growth continued to propel economic activity in Q3, leading the economy to expand for the seventh consecutive quarter and marking the longest stretch of growth in more than 15 years. Japan’s export-driven economy expanded 1.4% in seasonally-adjusted annualized terms in Q3, which was down from Q2’s stellar 2.6% expansion. Although the deceleration was a result of weaker dynamics at home, the domestic economy should pick up steam in Q4, as the slowdown mostly reflected temporary factors such as bad weather. Recent data confirms that private consumption strengthened so far in Q4, with consumer confidence hitting a four-year high in October. Prime Minister Shinzo Abe accelerated talks to revise Japan’s pacifist constitution following his landslide victory in the 22 October general election, and his party is expected to send its proposals to the national assembly ahead of January’s session.

Economic growth should lose some steam in 2018 as the tailwinds that propelled growth this year start to wane. Moreover, structural factors will continue to weigh on growth. On the upside, global growth should remain robust next year, while the Central Bank will likely keep its ultra-loose monetary policy. Met the why particular panelists see the economy growing 1.2% in 2018, which is unchanged from last month’s forecast. For 2019, they see growth at 1.0%.

UNITED KINGDOM | As Brexit uncertainty looms analysts see growth slowing next year

The economy continues to send mixed signals in the second half of the year. Recent data shows that growth in Q3 beat expectations, thanks to a resilient service sector and a jump in industrial production. In addition, both the services and manufacturing PMIs moved further into positive territory in October, while the unemployment rate remained at a multi-decade low in the third quarter. However, over the same period employment fell and the inactivity rate rose compared to Q2, hinting at a slight softening in a labor market which had remained rock-solid despite Brexit uncertainty. Growth has also lagged significantly behind the EU average since the start of the year, and with continuing negative real wage growth, private consumption is being fueled by consumers running down their savings. In early November the EU gave the UK two weeks to clarify its position on a financial settlement. Progress on this contentious issue must come before an EU summit on 14/15 December, if the EU-27 are to agree to move on to trade negotiations.

Growth is likely to slow next year, as private consumption growth dips and fixed investment is dampened by pervasive uncertainty generated by Brexit. However, a stronger external sector and resilient global demand should cushion the slowdown. Our panelists estimate GDP growth of 1.3% in 2018, which is unchanged from last month’s forecast, and 1.4% in 2019.  

INFLATION | Lower prices pressures in developed economies dampen global inflation in October 

Global inflation slowed from September’s 3.1% to 2.9% in October according to an estimate by Met the why particular. The print, which marked a four-month low, reflected lower inflationary pressures in most developed economies. Inflation in the U.S. declined noticeably in October as the cost of gasoline came back down after spiking in September due to hurricane-related disruptions. That said, underlying inflation accelerated in the same month, suggesting that the Federal Reserve’s concerns about persistently weak price pressures may finally abate. Conversely, inflation in emerging economies accelerated in October, reflecting higher commodity prices.

Against a backdrop of higher inflation and reduced economic slack, central banks are expected to tighten the reins next year in most developed economies. Conversely, the central banks in main emerging markets will cut their key rates, reflecting a more stable macroeconomic environment.

The Met the why particular panel projects global inflation of 6.1% in 2018, which is up 0.6 percentage points from last month’s forecast. Hyperinflation in Venezuela represents a sizeable share of the expected reading for next year. In 2019, analysts see global inflation moderating to 4.5%.

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David Ampudia

Economist

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