- Markets are too complacent about inflation risks; wage and core inflation will climb more quickly than many expect.
- Eurozone growth and inflation will surprise the consensus, enabling the ECB to normalize monetary policy quicker than anticipated.
- Key risks include a hard landing for China’s economy than expected, a swifter normalization of monetary policy in developed economies, geopolitical stress and heightened protectionism.
Last year delivered broad, synchronized growth, low interest rates and low inflation. Will these trends continue?
Strong and stable
Strong and synchronized global growth momentum, looser fiscal policies, and firming credit growth coupled with loose monetary policy and financial market conditions should continue to drive the world economy.
We’re particularly upbeat about the growth outlook for the eurozone, and to a lesser extent the US, among the developed economies, and India and parts of ASEAN among the emerging bloc.
Mind the gap
Given robust economic growth in many countries, markets are too complacent about inflation risks. We believe wage and core inflation will climb in the US and Europe in the coming months – more quickly than the market expects.
US growth will drive inflation and prompt rate hikes
In the US, the pickup in investment and increased productivity will continue to add to aggregate demand. The Tax Bill should provide further stimulus, as should increased spending. With the US economy close to full employment, inflation is likely to head back up towards the Fed’s target, which will induce further hikes in rates – we expect three this year and more to follow in 2019.
There are risks to this outlook, the most important of which is financial conditions. But our general view is that with a positive outlook globally, financial conditions are likely to remain fairly stable.
Normalization of monetary policy in the Eurozone
In the eurozone, we are fairly optimistic about the outlook: growth and inflation will surprise the consensus, including the ECB, on the upside. Some reasons for this are the positive outlook for the world economy, easy monetary policy and increasingly easy fiscal policy. Combined with likely progress on inflation, the ECB should normalize its monetary policy a bit quicker than the market anticipates.
Risks to watch
Key risks to our baseline views include a harder landing for China’s economy than expected, a swifter normalization of monetary policy in developed economies, geopolitical stress and heightened protectionism. You should also watch the BOJ’s policy stance very closely.
For further insight into our global economic outlook for the year ahead, you can read the full report on the Global Research Portal.