Which Way Will the Global Economy Go in 2018?

Executive Summary

The global economy has been growing for seven years, and we forecast that the expansion that is underway will remain intact through 2019. Inflation has been benign in most economies, but inflation rates should edge higher as spare capacity diminishes. Expectations of eventual monetary tightening in many foreign economies should lead to modest dollar depreciation vis-à-vis most foreign currencies. Overzealous tightening of monetary policy represents a potential downside risk to the global economic outlook as does a potential debt crisis in China. However, geopolitical events represent the most credible downside risk in the foreseeable future to our base case scenario that the global economy will continue to grow at a modest pace.

Global Expansion Likely Will Remain Intact

There has been an economic expansion underway in the global economy for the past seven years (Figure 1). That said, the 3.1 percent real GDP growth rate that the global economy registered in 2016 was the slowest rate of economic growth since the global financial crisis caused global GDP to contract in 2009. But global economic activity appears to have accelerated in 2017 if the upturn in global industrial production (IP) growth is any indication (Figure 2).1 Although the turnaround
in IP growth is most apparent in advanced economies, IP has also accelerated in developing economies. We estimate that global GDP growth has strengthened in 2017, and we forecast that the global economic expansion will remain intact in 2018 and 2019. (See Figure 1and the table at the end of the report.)

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