Major Economies Economic Outlook January 2018

Global economy set to post strongest growth in six years in 2017

Major Economies: Global economy set to post strongest growth in six years in 2017

December 22, 2017

The global economy continues to show strong resilience and is expected to expand at the fastest pace in six years in 2017. Households’ pockets are benefiting from improved labor markets across the globe and low inflationary pressures, especially in advanced economies. Moreover, loose financial conditions are shoring up business activity, while the drag from budget austerity has generally gone. Stronger-than-expected growth in China in Q3 translated into higher global demand, which reverberated positively through emerging-market economies. According to revised estimates by FocusEconomics, the global economy expanded 3.4% annually in Q3, overshooting the 3.3% growth in Q2.


The acceleration in Q3 reflected firmer growth in the United States on the back of an improving labor market and strong capital expenditure growth. The Euro area is firing on all cylinders and posted the strongest annual growth in over six years in the third quarter. The single currency block is benefiting from a healthy labor market, dynamic exports and loose monetary policy. Japan’s stellar growth story is similar, with the economy benefitting from strong global trade and a loose monetary policy stance. Despite an unemployment rate at record low levels, weak wage growth is, however, putting a dent in overall economic growth. Looking at the emerging markets, the economic recovery is broadening in Brazil, while India is slowly emerging from economic disruptions stemming from the GST implementation and the demonetization process.


Overall, the global economy is expected to end 2017 on a solid footing, with global GDP projected to expand 3.4% annually again in Q4. Economic data for Q4 corroborates the strength of the ongoing momentum. Manufacturing PMIs recorded solid readings in November and December, suggesting that global trade remains healthy.


Fiscal policy took center stage in recent weeks following the U.S. Congress’ decision on 20 December to approve the Republican tax reform bill, which includes tax cuts for corporations and households, and is valued at USD 1.5 trillion over the next decade. The reform is the most ambitious tax overhaul since President Ronald Reagan’s Tax Reform Act of 1986. Critics of the plan argue that it will benefit the wealthy more than the middle class and that it threatens to add pressure to the fiscal deficit and public debt. Japan is also drafting plans to cut taxes for corporations, although reductions to the corporate tax will be subject to salary increases and capital spending. Conversely to the United States, Japan decided to increase taxes for wealthy citizens in a bid to boost government revenues. The plan will likely be approved at an ordinary Diet session in January.


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Healthy growth momentum to carry over into 2018


The tailwinds that propelled economic growth in 2017 should remain largely intact next year. Tight labor markets will continue to shore up private consumption, while healthy global growth will boost trade across the globe. Despite the ongoing monetary policy tightening in the United States, global financial conditions will remain largely accommodative due to loose monetary policies by other key central banks such as the ECB and the Bank of Japan. Moreover, relatively low inflationary pressures worldwide, with the noticeable exception of Venezuela, will not put excessive pressure on other central banks to tighten their monetary policies. Moreover, the economic recovery will likely broaden in most emerging markets on the back of higher commodity prices. China, however, will be the main exception as it continues to sacrifice growth in favor of economic reforms.


Analysts expect the global economy to grow 3.3% in 2018, which is up 0.1 percentage points from last month’s estimate. In 2019, the global economy is seen decelerating slightly, to 3.1% growth.


This month’s upgrade to the 2018 outlook for the global economy reflects stronger growth projections for the Euro area and the United States. Growth prospects for Canada, Japan and the United Kingdom were left unchanged.


Among developing nations, India’s gradual economic recovery and resilient dynamics in China are supporting the economic outlook for the Asia (ex-Japan) region. Eastern Europe is benefiting from improving economic activity in Russia and stellar economic dynamics in the Euro area. Although expected higher oil prices for 2018 are good news for Middle East and North African economies, ongoing political unrest across the region is dampening the economic recovery. The outlook for Sub-Saharan Africa is influenced by two diverging forces: higher commodity prices and widespread security threats. In Latin America, next year’s uncertain election cycle is threatening the region’s economic outlook.


Head on over to our Major Economies page for more recent economic news on the region.


UNITED STATES | Congress passes most comprehensive tax reform in decades


The economy continues to show strength, with high-frequency data for this quarter pointing to sustained momentum. In November, the ISM manufacturing index eased on shorter delivery times but continued to showcase a healthy sector. Industrial production data, despite showing softer growth from the previous month, displayed particular strength in business equipment production, which bodes well for capital expenditure in Q4. The picture remains similarly upbeat among consumers, with data for November showing stronger-than-expected growth in employment and retail sales, an unemployment rate unchanged at a 17-year low and soaring consumer confidence. On the policy front, House and Senate Republicans ironed out differences on the tax reform plan and approved a new version on 20 December, giving President Trump his first major legislative achievement.


Deficit-financed tax cuts for corporations and individuals should lift consumer spending and business investment next year, although analysts expect the effect to be short-lived and the long-term impact detrimental to the government’s finances. The fiscal boost also comes amid robust growth momentum, with the economy operating at full employment and above long-term potential. FocusEconomics panelists see growth of 2.5% in 2018, which is up 0.1 percentage points from last month’s estimate. In 2019, growth is seen moderating to 2.1%. 


EURO AREA | Momentum continues to build in Q4  


The Eurozone economy is enjoying its brightest growth spell in over a decade. GDP continued to expand buoyantly in Q3, supported by solid investment and healthy overseas sales. Tailwinds from faster global growth, an improving labor market and record-low interest rates remain in place, and incoming figures for Q4 point to another period of fast expansion. The unemployment rate fell in October, and economic sentiment rocketed to the highest level since October 2000 in November. Furthermore, the flash manufacturing PMI hit a record high in December. A breakthrough deal between the EU and the UK, reached in December, has paved the way for trade talks and discussions over the future relationship. The deal averts a hard border with Ireland; it is a solid step towards reducing the uncertainty generated by the Brexit vote. While the progress bodes well, several difficult issues need to be tackled in the upcoming year to ensure a deal can be struck before the UK exits in March 2019.


Growth is expected to remain strong next year, albeit decelerate somewhat from 2017’s brisk pace. Although the economy will have to contend with several political hurdles next year, including elections in Italy, it appears unlikely that they will derail the strong momentum. FocusEconomics analysts project that GDP will expand a solid 2.1% in 2018, which is up 0.1 percentage points from last month’s forecast. In 2019, GDP is forecast to grow 1.8%. 


JAPAN | Prime Minister Abe unveils tax reform plan amid strong economic growth


Q3’s healthy growth momentum appears to have carried over into Q4 as strong global demand propels demand for Japanese goods. This year’s stellar export performance is supporting manufacturing activity, as highlighted by December’s PMI figure, which hit a nearly four-year high. Investment is also benefiting from resilient global growth, with business confidence in Q4 climbing to an over one-decade high. Although weak wage growth is preventing the economy from achieving a more sustainable trajectory, consumers are increasingly confident that their incomes will increase in the coming months, providing a glimmer of hope to policymakers. To shore up salary increases, the government unveiled a tax reform plan on 14 December, which includes measures to lower taxes for firms that increase wages by 3%. The success of this initiative remains to be seen, however, as the tax relief will be only for three years, discouraging businesses from pushing up wages.


Economic activity should remain strong in 2018 as healthy global growth and accommodative financial conditions in the country have positive spillovers on the Japanese economy. That said, the tailwinds that propelled growth this year will start to wane, weighing on economic activity. Moreover, private consumption will remain limited by weak wage growth. FocusEconomics 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 | EU and UK pave the way for an orderly separation


The economy continues to send conflicting messages. In December, consumers were less upbeat, while in November the services PMI dipped; however, the manufacturing PMI surged thanks to greater new orders from home and abroad. Employment fell in July–October from the previous quarter, and real wages continued to shrink, albeit at a more moderate pace. On 22 November, the chancellor presented the mildly expansionary Autumn Budget, which included measures to boost housebuilding, reduce stamp duty for first-time homebuyers, increase the minimum wage and allocate extra funding to health. This could make it more difficult for the chancellor to meet the mandate of reducing the structural budget deficit to below 2% of GDP by 2020/21, despite better-than-expected borrowing numbers in 2017. In early December, the UK and EU reached an agreement on Brexit separation terms, which paves the way for talks on a transition period and a future trade deal early next year. Agreeing swiftly on a transition period will be vital to providing certainty to firms and safeguarding investment in the UK.


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


INFLATION | Developed economies push up inflation in November  


Global inflation inched up from October’s 3.3% to 3.4% in November according to an estimate by FocusEconomics. The print was the result of higher inflationary pressures in most developed economies amid higher energy prices. Inflation among the largest emerging-market economies differed, however. Price pressures receded in China due to lower prices for fresh vegetables and inflation hit a new low in Russia. Conversely, higher accommodation and vegetable prices led inflation in India to rise sharply in November. In Brazil, inflationary pressures resurfaced slightly.


Against a backdrop of brisk economic growth and a strong labor market, the Federal Reserve delivered another rate hike in December, as expected. Despite the tightening cycle in the U.S., global financial conditions remain largely accommodative due to widespread low inflationary pressures.


The FocusEconomics panel projects global inflation of 2.7% for both 2018 and 2019. The print is broadly in line with the 2.6% expected for 2017. If the hyperinflation episode in Venezuela is factored in, global inflation will reach 7.6% in 2018 and 4.9% in 2019.


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David Ampudia


Economist

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