Another good year in store for the world, part II

Posted in Blog

By Mike Eggleton, Senior Manager, Analytics & Research, BCD Travel

Building on my previous post about the recovery of the global economy, here’s what we can expect for 2018.

All regions of the world should see strong economic growth continue in 2018, because:

  • The U.S. dollar will remain weak.
  • Inflation will remain low, despite strong economic growth.
  • Oil prices will average US$60 per barrel.
  • Central banks will tighten policy, e.g. raise interest rates, only gradually.

There are three main reasons why the world economy will continue to grow at such a healthy pace:

  1. Confidence among services and manufacturing companies remains high, and this is helping to boost output. This will in turn support strong trade growth in 2018.
  2. Businesses and consumers are finding it easier to access the credit they need to fund investments and spending.
  3. Investment may be starting to play a bigger role in the global economic recovery.

Should we be cautious?

While the prospects for global growth in the first half of 2018 are encouraging, there are some concerns that it might be derailed later in the year by a weaker performance from the U.S. economy.

Since the 2008/9 recession, the U.S. has expanded for eight years in a row (Figure 1). At some point, this period of uninterrupted growth will end. And when it does, the shock may be enough to trigger another downturn in the global economy.

Economic outlook

But we probably don’t need to be too worried. While the current period of expansion has been longer than usual, there have been much longer periods in the past, such as 1992-2007.

The U.S. economy is presently in such a good shape it will take a shock event to trigger an end to its expansion.

Risks to the outlook

Higher inflation and fiscal tightening

In 2017, inflation was much lower than the strength of economic growth would normally justify. This could be due to the amount of spare capacity in the global economy, and this could persist in 2018.

While stronger economic growth will inevitably support some wage growth, it will be only modest, and so will not put much upward pressure on inflation. And as inflation is unlikely to pick up, there will be little need for an aggressive monetary response – so no need for many interest rate rises.

Financial market weakness causes an economic slowdown

A surge in debt (as a proportion of GDP) has been most pronounced in the emerging markets. Many advanced economies have deleveraged, with consumers and businesses reducing their exposure to debt.

It’s hard to predict where U.S. equities are headed. The sharp fall seen in February suggests they’re primed for a correction; but they could continue to rise too. The risk of a correction seems higher in 2019.

There’s also some potential for a slowdown in house prices. While there’s no immediate risk, limited supply and rising mortgage interest rates could start to weigh down on demand.

Geopolitical instability

A conflict on the Korean Peninsula would hit the economies of South Korea, China and Japan, reducing each country’s growth by around 1%. It would also have a more modest impact on the U.S. economy.

Protectionism is a much bigger risk. If U.S. growth begins to disappoint, pressure will mount for more stringent measures to protect jobs. But this could prove to be counterproductive. Protectionism could hit U.S. economic growth as hard as China, the likely target for such measures.

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