Fitch Ratings-London-14 March 2018: The global economy is experiencing boom-like growth conditions and central banks are becoming less cautious as inflation risks rise, according to Fitch’s latest “Global Economic Outlook” (GEO). The US, eurozone and China are all likely to grow well above trend in 2018 and global economic growth is set to remain above 3% for three consecutive years until 2019, a performance not achieved since the mid 2000s.
“The acceleration in private investment, pro-cyclical US fiscal easing and global monetary policies that are still very loose are all boosting growth in the advanced economies, while high commodity prices and the weakening of the dollar have underpinned the emerging market recovery. China is gently touching the brakes but is still prioritising high growth in the near term,” said Brian Coulton, Chief Economist at Fitch.
Growth in advanced economies is benefitting from a strengthening investment cycle as business sentiment improves, external demand picks up and labour resources become increasingly scarce. Tax reforms in the US could also boost investment. The pick-up in bank lending in the eurozone is particularly helping small and medium-sized firms, which account for half of capex, but reduced economic and policy uncertainty and rising capacity utilisation rates are also supporting the investment outlook. We have revised up investment forecasts for the US and the eurozone.
Consumer spending in advanced economies is benefitting from the ongoing tightening in labour markets. Global monetary policy settings remain highly accommodative and credit conditions very easy despite the recent increases in bond yields. US fiscal policy is being eased aggressively, with the federal deficit likely to rise to over 5% of GDP by 2019 from around 3.5% in 2017.
Strong growth and declining unemployment have increased inflation risks in the advanced economies but a sharp surge in inflation still seems unlikely. The trade-off between inflation and unemployment has flattened in recent years, headline unemployment rates may understate slack and rising investment could boost productivity, holding down unit labour costs. Nevertheless, diminishing spare capacity is cementing the move towards monetary policy normalisation.
“Central banks are becoming less cautious about normalising monetary policy in the face of strong growth and diminishing spare capacity. We expect the Fed to raise rates no less than seven times before the end of next year. And while still sounding tentative, the ECB is clearly laying firm groundwork for phasing out QE completely later this year. We now also expect the BoE to raise rates by 25bp this year,” added Coulton.
We expect China’s economy to slow in 2018 as credit growth decelerates, housing sales flatten off and investment growth eases. Macro-prudential tightening has been a bit more concerted than expected but the authorities have recently reaffirmed their commitment to maintaining high growth rates in the short term. The wider emerging-market recovery has been helped by a weaker dollar and rising commodity prices but these benefits are likely to fade. We expect oil prices to fall back below USD60 per barrel (Brent) and the dollar to be supported by faster Fed rate rises and improving US growth prospects.
We have again upgraded growth forecasts as the eurozone recovery powers ahead, US fiscal policy eases by more than anticipated and investment prospects improve. US growth has been revised up to 2.7% in 2018 and 2.5% in 2019 from 2.5% and 2.2%, respectively, in our December 2017 GEO. Eurozone growth has been revised up to 2.5% in 2018 and 1.8% in 2019 from 2.2% and 1.7%, respectively. China’s 2018 forecast has also been revised up slightly (by 0.1pp) but growth is still expected to slow to 6.5% from 6.9% in 2017. Growth forecasts for Japan and the UK are unchanged for 2018 at 1.3% and 1.4%, respectively.
The key risks to the forecasts are a sharp pick-up in US core inflation – which would necessitate more abrupt, growth-negative adjustments in interest rates – and a major escalation in global trade protectionism. US-China trade tensions seem highly likely to increase in coming months but the situation would have to deteriorate quite dramatically to adversely affect the near-term global growth outlook.