Major Economies: Economic Snapshot for the G7 Countries
March 28, 2018
Trade war threatens to derail stellar global growth momentum
A complete GDP dataset revealed that global growth lost some steam in the fourth quarter of 2017, despite remaining robust overall. The global economy expanded 3.4% annually in Q4, which was a notch below both the 3.5% rise estimated last month, and the 3.5% expansion recorded in Q3 2017. The slightly lower figure was the result of weaker-than-expected growth in Latin America, particularly in Brazil. Conversely, newly released GDP data for India came in above market expectations. Data for Q1 signals that the economy continues to sail smoothly, propelled by largely accommodative monetary policies, tight labor markets and robust global trade. Against this backdrop, our analysts expect the global economy to expand 3.5% in Q1 on improved dynamics in both advanced and emerging market economies.
Despite the solid economic backdrop, the threat of rising protectionism has dominated headlines in recent weeks. Notably, the United States announced on 22 March its first set of punitive actions against China by proposing tariffs on up to USD 60 billion of imports from the Asian giant. Although China showed readiness to retaliate by announcing tariffs on USD 3.0 billion of goods, the U.S. decision leaves room for negotiation before implementation, an opportunity Beijing is unlikely to ignore in a bid to prevent further escalation. The risk remains that if negotiations fail, U.S. protectionism will spiral out of control and cause an all-out trade war with China, which would harm both economies and throw a wrench in the works of the global economy.
The U.S. decision to impose trade restrictions on China came only two weeks after the Trump administration announced tariffs on steel and aluminum products, citing national security grounds under Section 232 of the Trade Expansion Act. That said, many economies were given temporary exemptions before the tariffs came into force on 23 March, including the European Union and NAFTA partners Canada and Mexico. Negotiations over the North American trade agreement are still ongoing, and, although progress is painfully slow, the U.S. recently softened its stance on rules of origin in an unexpected sign of goodwill. All told, while the U.S. has turned more belligerent on the trade front in recent weeks, it has also taken a less aggressive stance in some areas.
On a more positive note, eleven countries signed the Comprehensive and Progressive Agreement for Trans-Pacific partnership (CPTPP) on 8 March, a trade liberalization deal that removes most tariffs for a bloc representing nearly 500 million people and more than 13% of global trade. The bloc—from which the United States withdrew last year—should stir trade flows across the Pacific and fuel stronger economic growth in all the countries involved. The CPTPP is expected to go into effect two months after most of the participants have domestically ratified the agreement
In the European Union, a whirlwind of political news has kept analysts on their toes. On 4 March, parliamentary elections in Italy yielded a hung parliament, with anti-establishment parties gaining over half of the seats and traditional parties being relegated to a state of political limbo. Despite signs of rapprochement between the North League and the 5-Star Movement, the country is unlikely to find a way out any time soon, heralding a period of political uncertainty ahead. Conversely, Germany put an end to over five months of political gridlock following the formation of the second consecutive alliance between the Social Democrats and Angela Merkel’s Christian Democratic Union.
Ongoing negotiations over Brexit have also grabbed headlines, with a draft withdrawal agreement reached on 19 March finally signaling progress in EU-UK talks. The draft establishes a transition period that will kickstart once the UK leaves the EU in March 2019 and last until 31 December 2020. This should provide more certainty to businesses and prevent an outflow of capital from the UK, although thorny issues remain largely unaddressed, mainly regarding the border with Northern Ireland.
Global economy to accelerate marginally this year despite growing protectionism fears
The sweet spot in which the global economy finds itself could quickly come to an end amid rising trade disputes between China and the United States. While the trade war appears to be circumscribed to these two countries for now, further antitrade measures against economies with large trade surpluses against the U.S., particularly the European Union, remain a possibility. Should these fears materialize, the ongoing stellar global trade cycle could sharply slow, hitting economic growth worldwide. Moreover, central banks are adopting a more hawkish tone in response to reduced economic slack which is beginning to push up inflation. Less accommodative monetary policies by key central banks could tighten financial markets and add downward pressure to global economic growth.
FocusEconomics panelists expect the global economy to grow 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 seen decelerating slightly, to 3.2% growth.
Although the 2018 GDP growth projection was unchanged from last month’s report, the economies of the Euro area and the United States both saw upgrades to their growth estimates. Growth prospects for Canada, Japan and the United Kingdom were left unchanged.
Among developing nations, China’s resilient economic growth, a strong global trade cycle and improving dynamics in India are shoring up 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 robust 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. Despite mounting geopolitical risks and economic imbalances, the outlook in the Middle East and North Africa, and in Sub-Saharan Africa, are gradually improving on the back of a higher commodity price environment.
UNITED STATES | Belligerent trade rhetoric clouds solid economic backdrop
The economy likely lost some steam in the first quarter of the year, partially reflecting residual seasonality but mostly the result of a moderation in consumer spending following robust growth in the previous quarter. Nonetheless, the underlying economic picture remains encouraging, with solid employment gains and accelerating wage growth buttressing private outlays and sentiment. Similarly, data for February showed healthy business sentiment and factory output underpinning an economy at full throttle. Trade measures enacted by President Trump’s administration could, however, counterbalance growth-inducing fiscal impulses. In recent weeks, the executive forged ahead with tariffs on steel and aluminum imports, which caused National Economic Council director and free-trade advocate Gary Cohn to resign. Trade tensions with China also flared up after the administration proposed tariffs on up to USD 60 billion worth of Chinese imports by invoking Section 301, which followed an investigation into intellectual property theft by China.
Protectionist policies bode poorly for the U.S. outlook, risking a global trade war and obscuring an otherwise very healthy economic panorama. A double dose of fiscal stimulus—tax cuts and higher government spending caps—should keep the economy running at a solid pace this year, while a tight labor market is expected to encourage higher fixed investment and household spending growth. FocusEconomics panelists see GDP expanding 2.7% in 2018, up 0.1 percentage points from last month’s estimate. In 2019, growth is seen moderating to 2.3%.
EURO AREA | Trade disputes with the U.S. take center stage
Detailed data confirmed that the Eurozone economy continued to grow robustly in the fourth quarter of 2017, capping off the best year of growth in over a decade. The solid reading was driven by a rebound in fixed investment, supported by optimistic business sentiment, and buoyant export growth despite a strong euro. Recent data for Q1 has been strong, albeit pointing to a moderation from prior levels. Economic sentiment edged down in February, while the composite PMI fell in March. However, the unemployment rate remained at a multi-year low in January. Meanwhile, the relationship with the United States, a major trading partner, has come into focus in recent weeks, after U.S. President Trump announced tariffs on steel and aluminum. On 23 March, the U.S. government announced that exports from the EU would be temporarily exempted until 1 May, and discussions on the topic are ongoing. A breakout of a tit-for-tat tariff battle could dent confidence and economic activity on both sides of the Atlantic.
A buoyant domestic economy should fuel another year of solid growth in 2018, as last year’s growth drivers are largely in place. Tight labor markets, high sentiment and accommodative monetary policy should support activity, while a strong euro could dent export growth. FocusEconomics analysts upgraded their forecasts for a sixth consecutive month this month and now see the Eurozone economy growing a robust 2.4% this year, up 0.1 percentage points from last month’s forecast. In 2019, GDP is forecast to grow 1.9%.
JAPAN | Economy remains in good health at the outset of the year
Economic growth momentum from 2017 appears to have partially carried over into Q1 of this year. In January, seasonally-adjusted unemployment fell to an over two-decade low, boding well for private consumption. Moreover, survey data suggested that, in March, the manufacturing sector expanded for the nineteenth consecutive month. Looking back, the economy performed better in Q4 than previously estimated, according to government data, largely due to an upward revision in private non-residential investment growth. Meanwhile, on 8 March, the government signed up to the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which will provide a lucrative opportunity for exporters upon coming into force. On the political front, pressure has increased on Prime Minister Shinzo Abe since 12 March, when news of corruption related to him and his wife resurfaced. This could dent his chances of being reelected as leader of the Liberal Democratic Party in September.
This year, the Bank of Japan’s ultra-loose monetary policy, a tight labor market and resilient global growth will the economy. The main downside risks stem from an abrupt slowdown in China, a key trading partner for Japan, and heightened geopolitical tensions that could strengthen the yen. FocusEconomics panelists see the economy growing 1.3% in 2018, which is unchanged from last month’s forecast, and 1.0% in 2019.
UNITED KINGDOM | EU and UK reach an agreement on Brexit transition period
The economy looks in decent shape so far this year. In February, the services PMI rose to a four-month high thanks to faster new orders growth, while the manufacturing PMI was well in positive territory. Employment surged in November–January, while the unemployment rate ticked down, and nominal wage growth is finally picking up after a prolonged period of depressed readings. Coupled with easing price pressures, this should lessen the strain on consumers. Chancellor Philip Hammond unveiled the Spring Statement on 13 March. Taking advantage of better-than-expected borrowing forecasts, it hinted at a slightly looser fiscal stance to raise spending on cash-strapped public services. A few weeks later, the government and unions reached a pay agreement for 1.3 million healthcare service staff, which will see above-inflation wage rises over the next three years. Around the same time, a draft agreement was reached between the UK and the EU on a 21-month transition period after Brexit, paving the way for trade talks.
This year the economy will likely lose momentum as private consumption growth slows and fixed investment is depressed by Brexit uncertainty. However, 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 1.4% in 2019.
INFLATION | Global inflation inches down in February on seasonal factors in East Asia
Global inflation inched up from January’s six-month low of 2.5% to 2.6% in February, according to an estimate by FocusEconomics that excludes Venezuela due to the lack of economic data and hyperinflation in the country. The print mostly reflected higher price pressures in East Asia due to seasonal factors related to the Lunar New Year holidays, which propelled demand for a wide range of products and pushed up prices. In this regard, inflation in China hit its highest rate in over four years. Reduced economic slack also pushed up inflation in Japan and the United States. Conversely, lower prices for food and more stable exchange rates continued to add downward pressure on prices in some countries such as Brazil, India and Russia.
Strong economic growth and gradually resurfacing inflationary pressures prompted the U.S. Federal Reserve to hike the federal funds rate by 25 basis points to between 1.50% and 1.75% at its 20–21 March monetary policy meeting. Moreover, Fed chairman Jerome Powell sounded more hawkish than his predecessor, signaling that the ongoing monetary tightening pace could accelerate. In Europe, despite leaving the current monetary policy scheme unchanged, European Central Bank President Mario Draghi stated that the current strong growth momentum in the single currency bloc led the Bank to drop its easing bias in March, signaling that the Bank could revise its policy guidance in the coming months. In Japan, meanwhile, the Central Bank once again ruled out any early exit from monetary stimulus even in fiscal year 2019, which is when the Bank forecasts that inflation will hit its target.
The FocusEconomics 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 141% in 2018 and 6.0% in 2019.
Head of Economic Research