2017 was mostly smooth sailing for the global economy. It was a year marked by broad, synchronised growth, low interest rates and low inflation. The question is, will these trends continue into 2018?
Here are our key expectations for the global economy in 2018:
Strong and stable
Strong and synchronised 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 are 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
Markets are too complacent about inflation risks in 2018. We believe wage and core inflation should still climb in the US and Europe in the coming months, and more quickly than the market expects.
Monetary policy complacency
We expect the Fed to raise short-term interest rates three times; the European Central Bank (ECB) to cease its asset purchase programme from September and raise short-term rates by 10bp in December; and the Bank of England to raise rates by a cumulative 50bp in 2018. The exception to this global process of policy normalisation is likely to be Japan.
Greater market volatility
We believe financial market conditions will remain well supported in the early months of 2018 thanks to continued quantitative easing by the ECB and the Bank of Japan (BOJ). However, as core inflation (and central banks) respond a little more forcefully to close the output gaps, yield curves will likely flatten and market volatility will increase.
Risks to watch
Key risks to our baseline views include a harder landing in China’s economy, a swifter normalisation of monetary policy in developed economies, geopolitical stress and heightened protectionism. We also think the BOJ’s policy stance should be watched 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.