Global Chartbook: December 2017

Executive Summary

The global economic rebound that has taken place in 2017 has carried its momentum into the final quarter of the year, creating a ‘rising tide' effect that has helped lift growth in much of the world. Global trade and industrial production have continued to accelerate, with world export volumes rising in September at the second fastest year-over-year pace since 2011. We continue to expect real global GDP growth to register 3.5 percent in 2017, up from 3.2 percent in 2016. If realized, this would put global growth back in line with both its average since 1980 and its average over the 2012-2014 period.

Economic growth has been supported by a firming in developed and emerging market economies. In the developed economies, U.S. real GDP accelerated in Q3 to a 3.3 percent annualized rate on the heels of a 3.1 percent gain in Q2. A more balanced composition of growth between personal consumption and business investment has helped spur economic activity, but the external sector has also played a role. With three quarters in the books, net exports have been additive to growth in each quarter this year in the United States. We expect real GDP growth in the United States to strengthen a bit next year, with full-year economic growth coming in at 2.7 percent. Economic growth in the Eurozone has been similarly strong this year, up 2.6 percent year over year in Q3, the fastest pace of growth since Q1-2011. Business sentiment across the Eurozone has been robust, and the unemployment rate has fallen 0.8 percentage points to 8.8 percent through the first eleven months of the year.

The strength in developed economies has stretched outside of the United States and Europe. The Canadian economy has benefitted from a stabilization in energy prices and stronger growth in the United States, helping to push real GDP growth to 3 percent year over year. Economic growth in Japan, while not wildly impressive on a relative basis, has quietly experienced the longest run of uninterrupted growth in 16 years. The United Kingdom has been one of the few 2017 laggards among the developed economies amid Brexit-related uncertainty and above-target inflation. Even there, however, industrial production has turned higher in recent months, with capital goods production in particular up over 8 percent year over year through October.

In the major emerging market economies, the biggest players continue to get back on track. The Russian and Brazilian economies have begun to emerge from deep recessions this year. Although we do not expect these countries to return to the supercharged growth rates that prevailed toward the end of the last global expansion, it is beneficial to the global economy to have these countries' economies headed in the right direction. Real GDP growth in India halted its streak of five consecutive quarters of slowing year-ago GDP growth in Q3 as demonetization effects faded and the rising global tide pulled the Indian economy up with it. China, which possesses the world's second-largest economy, has managed to stabilize economic growth in the 6.5-7.0 percent range. Structural headwinds related to demographics and financial leverage will continue to be a drag on economic growth in China, but we expect the authorities there to continue to guide the economy into a very gradual deceleration.

Against this backdrop, the slow but steady reversal away from monetary policy accommodation and towards monetary policy tightening is likely to continue in 2018. The Federal Reserve has led the charge on that front, with three fed funds hikes and the initiation of a balance sheet normalization program this year. The Bank of Canada has also moved to take its foot off the monetary policy accelerator this year. In Europe, the European Central Bank (ECB) refrained from ending its monthly asset purchase program in October, instead choosing to taper its purchases to €30 billion a month starting in January 2018. We expect purchases to eventually cease completely by late 2018 before an eventual slow process of rate hikes beginning in the first half of 2019. The return to monetary policy "normalization" is encouraging as it reflects an improvement in the economic fundamentals, but the removal of the extraordinary stimulus of the past few years will test the resilience of the global economic rebound. As Warren Buffet famously said, "It's only when the tide goes out that you learn who has been swimming naked."

As we have highlighted previously, additional risks to our outlook next year include Chinese non-financial corporate leverage, Brexit/EU complications, disruptions related to trade agreement renegotiations and general geopolitical risk that is nearly impossible to forecast but an omnipresent potential exogenous shock. On balance, however, the global economic recovery has become increasingly self-sustaining, with most of the world's major advanced and emerging economies "pulling" on the same side of the rope for the first time in years. As a result, we expect real global growth to remain near its long-run average of 3.5 percent. Furthermore, we expect global inflation to continue to recover from its swoon in the 2015-2016 period, helping to spur further monetary policy normalization around the world next year.

 

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