Weekly economic briefing: The world economy enters 2018 with real momentum

The Weekly Economic Briefing is written by two senior Deloitte Economists, David Rumbens from Deloitte Access Economics in Australia and Ian Stewart Deloitte’s Chief Economist in the UK. They provide a personal view on topical financial and economic issues. Subscribe to receive the Weekly Economic Briefing in your inbox!

In this week’s blog:

Australian economic briefing
UK economic briefing
International economic briefing

Australian economic briefing by David Rumbens

This section of the briefing provides a snapshot of key economic data and issues of relevance to Australia.

The world economy enters 2018 with real momentum

Global economic growth finished 2017 better than expected – reaching 3.0% for the calendar year – with the improvement a key reason for Australia’s improved economic performance also.

The synchronised global recovery, as shown by the uptick in the chart below, was characterised by economic growth and falling unemployment in both advanced and emerging economies. In fact, the pick-up in investment and trade activity facilitated several large developing economies to emerge from recession in 2017, including Brazil, Nigeria and Russia.

Increases in global trade activity also benefited advanced economies. The year was characterised by a remarkable strengthening of business confidence, particularly in Japan and the Eurozone, and surges in equity markets as improved consumer sentiment and easy credit conditions facilitated strong equity price growth. The economic performance also allowed some modest tightening of monetary policy in the United States, the United Kingdom and China.

According to the latest release of the World Bank’s Global Economic Prospects, the momentum is expected to continue, with global growth forecast to reach 3.1% in 2018. The majority of this is expected to come from emerging and developing economies, which are projected to strengthen to 4.5% growth in 2018. Activity in commodity export economies is also expected to continue to recover amid firming prices.

Chart 1: Economic growth in advanced economies and emerging economies

Source: World Bank

 

Growth in advanced economies is expected to moderate slightly – to 2.2% this year – with central banks expected to gradually increase interest rates away from current emergency low settings. The US Federal Reserve has already indicated that it plans to raise rates three or more times throughout 2018. The World Bank’s expected economic growth rates for major economies of relevance to Australia are shown in the chart below.

Chart 2: Economic growth prospects in 2018

Source: World Bank

 

It’s a “steady as she goes” projection, building on a 2017 which showed good economic growth, with very little volatility across key financial indicators. Yet despite the recent lack of volatility, risks to the global recovery still remain. A disorderly financial adjustment presents a potential risk, as a correction in asset prices or a sharp increase in interest rates would be difficult to recover from given elevated asset valuations and high levels of indebtedness. Household debt in Australia remains a particular concern on this front.

Other risks include geopolitical and policy uncertainty, including the potential to restrict trade flows via imposing tariffs or abandoning trade agreements. This danger remains present, despite the fact that stronger trade flows were a key driver of the improvement global economic performance through 2017.

But perspective is important. While GDP growth is forecast to improve in 2018, it still remains below pre-GFC rates.  And while the World Bank and many other economists are expecting economic growth in the coming year to consolidate or improve, long term growth forecasts have fallen. This means that improvement in living standards per capita (while still rising) are showing more marginal gains year-by-year than they were a decade ago.

For more information on the Australian brief, please contact co-authors David Rumbens and Wilma Gillies.

 

UK economic briefing by Ian Stewart

A personal view from Ian Stewart, Deloitte’s Chief Economist in the UK. Subscribe to and view previous Monday Briefings at: http://blogs.deloitte.co.uk/mondaybriefing/

2018 global economic outlook

  • The global economy enters 2018 with good momentum. Expectations for growth this year are rising in many countries, equities are hitting new highs and business confidence is buoyant.
  • The worries around Brexit, the US elections, risks in the Chinese economy and populism in Europe that loomed large 12-18 months ago have eased. Our “worry index”, which tracks references to terms such as risk, uncertainty and instability in the major business papers has fallen by 30% from its 2016 peak.  Financial measures of risk have declined, so much so that some see markets as overly complacent.
  • Last week’s surge in the oil price, to a three year high of $70, fits with the idea of gathering global demand. A pickup in global trade has pushed up the benchmark index of sea freight rates by 50% in the space of a year.
  • This looks like that rare thing: a synchronised global recovery, across developed and emerging countries, that is delivering lower unemployment. In much of the rich world, including the US, Germany, Japan, and the UK, jobless rates are close to, or lower, than at any time in at least 25 years.
  • The turnaround has been particularly pronounced in two regions which have suffered persistently weak growth in recent years. Japan and the euro area saw unexpectedly strong recoveries in 2017. Both economies should post rates of growth this year at or around the levels seen last year. For the euro area 2017 and 2018 seem likely to be the best two year period for growth in 11 years.
  • America’s recovery has unfolded in line with earlier expectations, confounding the fears of Trump sceptics and dashing hopes of an immediate ‘Trump boost’. The upswing was already underway at time of the Presidential election in late 2016, and has speeded up since last spring. Buoyant business and consumer confidence and still-easy credit conditions point to a further acceleration in US growth this year. Tax cuts for consumers and business should bolster the growth. The Federal Reserve will continue to lead the world in tightening monetary policy. Markets are assuming that US interest rates will rose at least a further 75bp this year, taking them to 2.25%.
  • Among emerging market countries Latin America, the Middle East and Africa look set to see the most marked acceleration in activity this year. In Asia, the world’s fastest growing region, the pace of activity is likely to remain broadly constant, with a continued, long term deceleration of Chinese growth offset by faster activity in India. India is likely to be the world’s fastest growing economy in 2018, with growth around the 7.5% mark, with China and the Philippines in joint second place with growth of around 6.5%. Thus, getting on for 40% of the world’s population live in countries which are expected to grow by at least 6.0% this year.
  • While worries about growth have reduced and growth has accelerated in much of the world the reverse has been the case in the UK. Brexit-related uncertainty has weighed on business confidence and spending while a weaker pound, by pushing up inflation, has hit consumer spending.
  • Although the pace of growth has slowed I would not overdo the gloom about the UK. In contrast to the euro debt crisis, which triggered a euro recession in 2013-14, Brexit has caused a slowdown in UK activity, from 2.2% in 2016, 1.8% in 2017 and perhaps 1.6% in 2018. Unemployment has continued to decline, with the jobless rate now at the lowest level since 1975. Sterling weakness, while bad news for consumers, has been a boon for exporters who are also benefitting from stronger global demand. An expected easing of inflation this year, and a modest pickup in wage growth, should mean that this year is a slightly better for real incomes than last.
  • There are two caveats to this generally bright picture for the global economy.
  • The first is that growth rates remain below the levels seen before the financial crisis. This partly reflects slower growth in, and in some countries, a contraction, of the workforce as populations age. Weakness in global trade, a more deflationary environment and poor productivity growth have also weighed heavily on activity. The trade picture has improved but to turn more optimistic on long term growth we’d need more signs of improvement in these areas. An early sign would come in the form of growth in investment and wages.
  • The second caveat relates to risks. Financial markets are in ebullient form and seem to shrug off any bad news. Yet political risks, be it the rise of populist political parties or the threat from North Korea, Iran or from EU fragmentation, have not gone away. To achieve a smooth exit from the EU in March 2019 the UK will need to strike a deal with the EU by this October. Beyond that lies further negotiations which, in relation to trade with the EU, could stretch well into the 2020s.
  • But for my money the main risks to the global recovery are economic. Protectionism remains a potent threat. The Trump administration remains sceptical about the current global trading order. The renegotiation of the North American Free Trade Agreement and trade relations with China provide obvious flashpoints. Meanwhile tighter monetary policy could inadvertently knock equity and debt markets and trigger an economic downturn. That is how many post-war recoveries have come to an end. Levels of debt in many countries are high and consumers and corporates have got used to cheap money. It may not feel like it, but the recovery is mature and at a stage when growth normally peters out (America’s recovery is into its ninth year and is the third longest in US history).
  • The general view among economists and policymakers is that 2018 will be a rather better year for global growth. It’s a view I share. Still, we will be keeping a close eye on how markets react to tighter monetary policy. And we’ll be watching for signs that the Trump administration is putting its protectionist rhetoric into action. The big nice surprise for the world economy this year would be a recovery not just in growth, but in wages, investment and productivity too.

PS: Last week official data painted a picture of continued resilience in UK corporate profitability. The ONS’ preferred measure of corporate profitability, the net rate of return, has held up since the Brexit referendum. The latest reading, at 12.6% in 2017Q3, is at the level it was before the EU referendum in June 2016.

 

OUR REVIEW OF LAST WEEK’S NEWS

 

The FTSE 100 ended the week up 0.7% at 7,779.

The European Central Bank (ECB) announced that the euro area has moved into ‘expansionary territory’. In its latest policy meeting minutes, the ECB signaled to investors a potential shift in monetary policy later this year by bringing its asset purchases to an end. The euro rose on the news.

International economic briefing by Ian Stewart

Economics and business

  • The price of oil hit a three-year high of nearly $70 a barrel due to production cuts and geopolitical uncertainty
  • Bill Gross, renowned bond investor, announced that bonds were now in a bear market
  • The number of M&A deals in the UK hit a record high last year
  • UK factory output is growing at its fastest pace in almost seven years
  • International students contribute £22bn to the UK economy every year, according to Higher Education Policy Institute research
  • UK house prices grew by 2.7% in 2017, less than half the rate of growth in 2016, according to Halifax
  • The British Chambers of Commerce warned that labour and skills shortages were likely to be the biggest challenge that UK firms face this year
  • Unemployment in the euro area fell to its lowest level in nine years during November
  • French M&A deals reached their highest level in a decade during 2017, in a sign that Mr Macron’s pro-business policies are having a positive effect
  • The price of Bitcoin fell by $2,000 on the news that South Korea is planning to ban cryptocurrency trading
  • Donald Trump is set to attend the annual World Economic Forum in Davos this month, making him the first sitting US president to attend in 18 years
  • Online retailer Ocado are to trial a humanoid robot in its warehouses to reduce reliance on human workers

 

Brexit and European politics

  • German Chancellor, Angela Merkel, unveiled a coalition deal between her CDU party and the centre-left SPD; senior SPD members have voiced fierce criticism against the deal
  • Pro-Russian incumbent Milos Zeman, who has stoked controversy with his support for Vladimir Putin and anti-immigrant rhetoric, has won the first round of voting in the Czech presidential election
  • There is no evidence of City workers relocating to the continental EU as a result of Brexit, according to the recruitment firm Page Group
  • The former UKIP leader, Nigel Farage, called for a second Brexit referendum to “kill off” the Remain campaign
  • British Chancellor Phillip Hammond told European leaders that “It takes two to tango” and they also need to “signal what future relationship [they] would like to have with a post-Brexit Britain”
  • A survey by Rathbone Investment Management found that UK savers are more concerned about low interest rates and overall economic uncertainty than Brexit
  • The FT reports that the UK will seek to remain regulated by the European Medicines Agency after Brexit
  • The Guardian reports that British yacht builders are experiencing a boom, with the weaker pound making their vessels better value compared to European and US rivals
  • The Guardian reports that the EU will resist any renegotiation of fishing quotas during the proposed two-year transition period after Brexit
  • The number of Britons applying for French citizenship has risen tenfold in the last three years, according to figures from the French interior ministry
  • Ministers from Germany, France and the UK called for Donald Trump to back the 2015 Iran nuclear agreement
  • A centre-right coalition headed by former Prime Minister Silvio Berlusconi’s party appears “very close” to reaching a parliamentary majority in Italy, according to Tecne’s party chairman

 

And finally…

MPs belonging to France’s new La Republique en Marche party reportedly drunk only half the amount of wine that their predecessors drank – preferring soft drinks – meaning that the National Assembly has had to cancel an order for 5,100 bottles of claret to avoid waste – sober thought


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