The Weight of the World Is a Lighter Burden

U.S. Overview

Inflation Alters the Path to Point B

This month an increase in inflation expectations is the central theme. Compared to February, the new outlook anticipates a slight upswing in the pace of total and core PCE deflator measures of inflation. Higher inflation translates into a fourth increase in the funds rate this year. In the economy, real final sales has downshifted to a 2.5 percent growth rate from 2.8 percent, reflecting lower expectations for consumer spending and residential investment. Moreover, federal deficit estimates have moved up in 2018 and 2019. To restate our view, the “cautious tale” we highlighted in our Annual Outlook for 2018 is playing out, as both higher inflation and interest rates will subtract from the forward momentum in the economy. Alterations in expectations for growth (see real final sales below), inflation and interest rates continue to lead to volatility in the financial markets. We remain cautious also on the seasonality problem that has plagued first quarter GDP estimates to be released in April.

Long-term rates have moved, as the additional problem of Treasury debt supply and demand confronts the market going forward. This tension is a major concern. With the Fed focused on raising short-term rates, the Fed’s reduction of the balance sheet and the upswing in Treasury finance estimates will put an upward bias to long-term rates. In terms of corporate profits, a rising interest rate environment and a tight labor market cause us to project trend like growth into 2019. However, this may well be below market expectations.

International Overview

The Weight of the World Is a Lighter Burden

There is never a time without risk, but unlike much of the past decade, the global economy, at least for the moment, is not hindered by a major and obvious negative from abroad. In the early years that followed the global slowdown of 2009, there were worries about the sovereign debt crisis in Europe in 2010 and the double-dip recession that followed in 2011. Then came concerns about a significant moderation in the pace of GDP growth in China from 2010 to 2014, and the negative knock-on effects that it had on emerging market economies across the world. After oil prices peaked in 2014, the steep drops in oil and commodity prices presented a major drag to commodity-reliant economies like Russia and, to a lesser extent, Canada in 2015 and 2016.

With no major economy going through that type of turmoil more recently, there has been a broad pick-up in economic activity the world over. We now estimate that global GDP grew 3.6 percent in 2017. We look for the global economy to expand roughly 3.5 percent this year and in 2019.

This is no time for complacency. While the global economy may be enjoying a respite from the challenges it has faced over the past decade, there clearly are a number of geopolitical events and protectionist trade policies that could raise risk aversion in financial markets and be disruptive to the business sector. A similar outcome could result if central banks become too aggressive in their removal of policy accommodation. Barring any of that, the weight of the world is a lighter burden.

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