The outlook for the global economy in 2018 is encouraging to say the least. According to the consensus data from Bloomberg, the median forecast for global GDP growth in 2018 is 3.7%, which is a slight increase from the 2017 forecast of 3.6%. The 2018 forecast has risen from the 3.4% forecast at the start of last year. The forecast upgrades started to come through during the summer. All the major economies, with the exception of the UK, have had upgrades. The US growth forecast has accelerated from 2.3% to 2.6%, Europe from 1.6% to 2.2%, Japan from 1% to 1.3%, China from 6.3% to 6.5%. The UK is expected to grow by 1.3% in 2018.
The global economy is benefiting from an increase in commodity prices and global trade, both of which are closely correlated. Commodity prices have been driven by increasing demand and restricted supply.
The banking sector is also beginning to support the global economy. This is as a result of the banking sector (following the 2008 financial crisis) recapitalising, selling assets, and generally becoming profitable and, therefore, in a better position to lend.
2018 has started positively for the US, with the US Institute of Supply Management’s Manufacturing Index beating expectations and rising close to a 13 year high.
US Non-Farm Payrolls rose 148,000 in December, which was below expectations. However, the unemployment rate remains at a 17 year low of 4.1%, for the third successive month.
Despite US unemployment being in a long downward trend, wage growth over the last few years has been subdued. There are a few possible explanations as to why wage growth is subdued.
The first is globalisation, as there is evidence that globalisation and global competition have reduced the ability of firms to pass on wage increases.
Another possible explanation is that central banks, with their inflation targets, have managed to establish more credible monetary policies and this has resulted in inflation becoming better ‘anchored’.
A third possible explanation relates to changing working patterns, which includes the growth of the self-employed, part-time workers and other flexible employment practices.
The latest US payroll data has shown tentative signs of US wages beginning to rise, but it is still early days as to whether we will see genuine wage growth.
US inflation, as measured by the Consumer Price Index (CPI), rose 1.8%, year on year, in December. This is likely to keep the Federal Reserve on track for raising interest rates, despite concerns in the payroll data.
The US has experienced another shutdown of the federal government, which followed the failure of Congress and the Senate to pass legislation to fund government operations and agencies. The shutdown began on the first anniversary of Donald Trump’s Presidency. Although the legislation has now been passed and the government is up and running, it illustrates the political issues Donald Trump is having, despite having a Republican majority in both houses. This begs the question – will Donald Trump be able to introduce his trade protectionist policies?
Although the growth in the UK economy has slowed, the UK economy has benefited from a weak currency. This can be illustrated from the UK’s trade deficit, which narrowed by £2.1 billion in the 3 months to November 2017.
The UK Purchasing Manufacturing Index (PMI) fell to 56.3 in December 2017 from November’s 51 month high of 58.2, which was below market expectations of 58. Net export sales continue to increase, with demand increasing from clients in Europe, the US, China and the Middle East.
It must be pointed out that although Sterling has been extremely weak over the last 18 months, it has strengthened over the last month, and this may affect export sales in the months ahead.
UK inflation, as measured by CPI, rose 3%, year on year, in December, down from 3.1% in November. This slight fall indicates that UK inflation may be past its peak.
The Office of National Statistics’ Quarterly Profitability of UK Companies revealed that the profitability among British businesses is holding up and much better than expected. The net rate of return for Britain’s non-financial businesses was largely unchanged for the three months to September 2017, compared to the previous quarter.
Although UK exports are growing strongly, the latest retail sales figures reveal that the domestic economy is continuing to grow at a slower pace. In the three months from October to December, the quantity bought in retail sales increased by 0.4% compared with the previous three months. Whilst the underlying pattern remains one of growth, this is the weakest quarterly growth since the decline of 1.2% in the first quarter (January to March) of 2017.
The latest PMI data for the major Eurozone economies showed growth momentum strengthening.
Inflation (as measured by CPI) in the Eurozone, rose 1.4%, year on year, in December, unrevised from the preliminary estimate and compared to 1.5% in the previous month.
Economic data in Japan has been sufficiently strong to push the Bank of Japan into cutting its purchases of 10 to 25 year debt by ¥10 billion to ¥190 billion, under the country’s Quantitative Easing programme. This is the first reduction since December 2016.
China’s GDP grew 6.9% in 2017, ending the year on a positive note, as official figures beat the government’s target of 6.5%. The growth came despite concerns in the last year, from a government led economic restructuring. In 2018, the Chinese economy should benefit from strong external demand and robust domestic household consumption. The risks to the Chinese economy in 2018 include trade protectionism, as Donald Trump’s administration looks to address the large trade gap between the two countries.
The price of Brent Crude is now over $70 per barrel and has recovered from its historic lows. The oil price has benefited from OPEC and Russia agreeing to cut supply. If the oil price continues to rise, there could be an inflationary shock, which is a key risk to the now buoyant global economy.
2018 looks like being a prosperous year for the global economy; however, there are a number of risks that need to be taken into account. These include the oil price and Donald Trump potentially introducing trade protectionist measures. We must also not forget North Korea.