Tim shares his thoughts on growth prospects for the year ahead along with areas and events investors might want to be mindful of as 2018 unfolds.
Economic update: 2017 round up and 2018 outlook
The information in this video is a high level assessment and should not be seen as advice or recommendation for any particular investment strategy or to buy or sell investments.
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Welcome to our 2018 economic outlook. The good news is we think the recent growth momentum can continue this year. The bad news is it is highly unlikely that asset prices will deliver the same kind of great returns we saw over the last 12 months.
Now, if we look at what has been happening to global growth, we have seen a pickup from around 2.25% in early 2016 to today’s run rate of roughly 3.5%, and this should continue throughout 2018. The other notable feature is just now synchronised global growth has become. Pretty much every region in the world is now participating in this expansion; China is still performing well despite concerns around the debt build-up, and even the Euro area surprised positively over the last year.
Perhaps the one notable exception is the U.K., where growth has been still been somewhat sluggish, this on-going uncertainty around Brexit just holding back business investment, and there is still this squeeze on real incomes from the earlier fall in the pound. Even so, we still expect the U.K. to grow around 1.5% this year, as exports perform quite well, given the drop in sterling I mentioned and the strong global growth backdrop.
What has been driving this global growth? Well, we have seen extraordinarily low interest rates and they are set to continue, easy financial conditions, and signals from the banks that they are willing to extend credit to the broader economy. But, also, we’re seeing more supportive fiscal policy.
It is on this latter point that our first big risk materialises, because in the U.S., we have seen this large tax cut package pass through Congress towards the end of last year. Now, this is coming at a time when the U.S. economy is already growing at a rapid pace and is at full employment, it doesn’t need additional stimulus. The danger here is it just adds to growth in the short run, but then inflation and overheating pressure in the medium to longer run, and this could encourage the Federal Reserve to raise interest rates more aggressively than the market currently expects.
Our second main risk is around quantitative tightening, so this is the reversal of the quantitative easing, the buying of assets by Central Banks over the last few years. Now, economists are still debating exactly what impact those asset [product issues] had on global growth, so it is very hard to judge exactly what will occur as we start to withdraw that stimulus. This is one of the key uncertainties.
Our third main risk is China. I mentioned the big build-up of debt, it looks like it is enjoying a soft landing, but say, U.S. interest rates rise more aggressively, that could trigger capital outflows from China, and could be a concern for growth moving forward.
And our fourth major concern, political risks, well, they didn’t really flare up in 2017. We’re watching North Korea closely, developments in the Middle East, concerns around the Italian elections, and of course, the Brexit negotiations. But our base case is that we do, again, end up in some kind of transition agreement, but of course there is a risk that we get no deal whatsoever.