The global economy has improved markedly this year and is on course to record its fastest expansion since 2010, but the current favourable mix of strong growth and highly-accommodative macro policies could be as good as it gets, says Fitch Ratings in its latest Global Economic Outlook (GEO).
“Our forecasts imply something of a ‘sweet spot’ for the global economy in 2017 and 2018 with above-trend growth and still highly accommodative global monetary policies. However, this is not a pattern we expect to persist into 2019 and beyond as output gaps close in advanced economies and monetary policy support is withdrawn,” said Brian Coulton, Fitch’s Chief Economist.
Fifteen of the 20 countries covered in our GEO saw better-than-expected GDP outturns in 2Q17 and in several cases – including Canada, Russia, Turkey and Poland – the positive surprises were large at over 0.5% (not annualised). Forecasts for 2017 growth have been upgraded for 13 countries and seven countries have seen an increase in 2018 growth forecasts. Global growth has been upgraded to 3.1% in 2017 from 2.9% in June, and 2018 growth has been upgraded to 3.2% from 3.1%.
“Following another forecast upgrade in this GEO we now see the eurozone growing at its strongest rate for a decade in 2017, ” added Coulton.
The advanced economies are benefitting from improving labour markets and supportive macroeconomic policies, while growth in emerging markets (EM) is returning to a four-year high following a pick-up in China and demand recovery in many large commodity-producing countries. Simultaneous improvements across most of the major economic regions are being amplified by positive spill-overs from trade linkages. The upturn in Chinese import growth from mid-2016 has been an important factor behind the rise in world trade growth to a six-year high of 5%.
This buoyant picture should be maintained through 2018. The US private investment cycle looks set to improve further and while prospects for tax reform are uncertain, a modest fiscal boost to US growth in 2018 still looks likely. The slowdown we are expecting in China in the near term is relatively modest and all the while China’s weight in global GDP is rising – adding to its global growth contribution. Barring a renewed commodity price slump there is space for demand to recover further in EM commodity producers.
However, caution is still warranted on the medium-term growth outlook. Supply-side growth potential in the advanced economies will be dampened by deteriorating demographics and sluggish productivity growth. Current rates of GDP growth are well above Fitch estimates of potential across most major advanced economies. This implies that spare capacity is diminishing and has implications for policy support as current expansionary settings will become harder and harder to justify. And while credit growth in China has recently slowed, it continues to outpace nominal GDP. The process of stabilising debt in China is likely to take a toll on growth in the medium term.
“With the Fed having now announced the start of the process of unwinding quantitative easing and the ECB likely to phase out asset purchases by the middle of next year, central banks in other advanced countries are also now contributing to a shift in the mood music surrounding global monetary policy,” said Coulton.
The Bank of Canada has recently raised interest rates twice in rapid succession despite inflation remaining quite low, while the Bank of England has signalled that last years’ rate cut could be reversed in coming months if the economy evolves as expected. Even the Bank of Japan looks in practice to be scaling down its rate of purchases somewhat from the official target of JPY80 trillion of government bonds per year.
Geopolitics has re-emerged as a noteworthy risk. The implications of North Korea tensions will be important to monitor, including for US-China relations in the context of the US administration’s concerns about the US-China bilateral trade deficit. Eurozone fragmentation risks have fallen since the beginning of the year but forthcoming Italian elections could see eurosceptic arguments regaining prominence and a further sustained escalation in tensions between the Catalonian and Spanish government could imply some downside risks for Spain’s recent impressive growth performance. A strong recovery in the dollar could also adversely affect EM capital flows.