World Economic Growth Is Expected To Remain Close To 4% In 2018 And 2019 - Thursday, August 23
Although many signs seem to suggest that a peak has been reached in the growth rates of the advanced economies, the outlook is more uncertain for the emerging market economies.
Virtually all advanced economies are coming off relatively strong job markets with unusually low and stable inflation. China, India and the U.S. are expected to be the largest contributors to the 4% global growth outlook.
Monetary accommodation is still working its magic, though in the U.S. monetary stimulus is being gradually eliminated by interest rate increases and the shrinking of the Federal Reserve’s balance sheet. Central bank accommodation is also starting to ease back in Canada, Europe, and the United Kingdom. Most of the advanced economies are also experiencing some fiscal easing, and in the wake of their strengthening economies, labor shortages are starting to emerge.
Although wage and price inflation continue to be relatively modest in the U.S. and Canada, these indicators have turned a corner and are projected to increase moderately through to the end of next year.
Of course, the somewhat rosy economic outlook for the advanced economies is predicated on no major economic or financial shocks, an assumption which seems rather naïve in the current context of a possible trade war. Among the most prominent worries on the horizon (higher oil prices, the major escalation financial debts, trade wars, Brexit), the one major problem that does not seem to have been given enough credence is the emerging market countries indebtedness to the advanced economies.
A number of these countries (e.g. Turkey and Argentina) have relatively huge exposure to foreign currency denominated debt. Of course, as their local currencies plunge, (and for Turkey this has already occurred) this would shift their economies into a currency crisis.
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Assuming No Major Economic Shocks, Advanced Economies Growth Will Likely Moderate A Bit Next Year
With respect to the U.S. economy, still by far the largest in the world, the economy rebounded at a robust 4.1% annual rate in the second quarter but is expected to expand at a much more moderate pace over the balance of this year and into 2019. growth. The U.S. economy, which is virtually fully employed and with little new spare industrial capacity, is projected to expand at just under a 3% pace in both 2018 and 2019.
The American labor market continues to tighten, but wage and price inflation remains quite moderate. Nonetheless, inflation has recently increased up to the Federal Reserve’s 2% target, in effect validating the Fed’s desire to normalize interest rates. However, even as the Fed continues to slowly shrink its balance sheet (i.e. as a net seller of government securities), financial conditions continue to remain quite easy and supportive of economic activity.
Canada’s economy, which is heavily influenced by U.S. growth, is projected to expand closer to a 2% pace this year and in 2019. The Canadian economy expanded 3% in 2017 as compared to a 2.3% growth in the U.S.
The Euro area economies are projected to maintain slightly more than 2% growth through to next year, even as Britain’s economy is projected to continue to slow primarily reflecting the Brexit worries (1.4% in 2018, 1.3% in 2019).
India and China, the two largest countries in terms of population, are expected to maintain their recent strong growth patterns, though India’s economy is once again projected grow faster than China’s in 2018 and 2019.
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Disclosure: None.