2018 Global Economic Outlook: What The World’s Leading Investment Banks Are Saying

Investing

2018 Global Economic Outlook: What The World’s Leading Investment Banks Are Saying

Will the global economy be able to sustain its phenomenal pace of growth in 2018? Let’s find out what the experts think.

Published on 2 January 2018

The global economy expanded rapidly last year, surpassing most experts’ expectations. According to the International Monetary Fund (IMF), the world economy grew by 3.6% in 2017.

But can this pace of growth be sustained in 2018? Will this year see a surge in economic activity or are we at the end of the business cycle? The IMF is quite optimistic and predicts that Europe, Japan, China, and the US will continue to lead the global economic expansion that is currently underway.

Of course, economic performance will vary from country to country. China and India are expected grow more rapidly than their advanced economy counterparts. The US economy will continue to expand, but likely at a slower pace as it enters the next stage of the business cycle.

Here is what the world’s leading investment banks have to say about global growth prospects in 2018:

Expect global growth to continue

Gross Domestic Product, GDP, Economic Growth

There is near unanimous agreement among experts that in 2018 the world economy will remain in expansion mode. Most analysts are of the view that the growth will be broad-based.

In a recent report, Ajay Rajadhyaksha and Michael Gavin of Barclays, a British multinational bank and financial services company, wrote, “The ongoing economic expansion has substantial momentum. It is not overly reliant on any single geographical region, industry, or source of demand. It does not seem to have generated economic or financial excesses that pose an immediate threat.”

Jan Hatzius of Goldman Sachs, a leading American investment banking firm, says that the current outlook is “as good as it gets” and forecasts that the global economy will expand by 4% in 2018. Hatzius points out that the world’s biggest economies are growing faster than they were immediately prior to the global financial crisis of 2007-08.

JPMorgan Chase, a US-based multinational banking and financial services company, estimates that global growth will register a rise of 3.7% in 2018.  The firm says, “A traditional global business cycle dynamic is taking hold. A positive feedback loop linking growth to supportive financial conditions and rising sentiment provide fuel for a second year of synchronised above-trend global growth in 2018.”

Europe’s rate of growth will decrease

Gross Domestic Product, GDP, Economic Growth

In 2017, Europe’s gross domestic product (GDP) expanded by an estimated 2.4% – its fastest rate of growth since 2007. The Economist Intelligence Unit, which provides forecasting and advisory services, estimates that in 2018, Europe’s GDP will continue to grow, but at a lower rate of 2.1%.

The economies of the European nations may expand even faster than that. The last quarter of 2017 saw an upsurge in economic activity, which could result in better performance in the early months of 2018. However, Europe’s growth is likely to remain subdued.

One factor that could contribute to this is the slower pace of expansion in certain export markets. Europe, especially Germany, has close trade ties with China, and if the Asian economic superpower’s pace of growth slows, this could negatively impact European firms.

In a report titled European Growth To Remain Good, Albeit Slower, UBS, a Swiss financial services company, points out that a stronger euro may hamper growth. However, domestic demand will continue to expand.

According to the Bank of England, the UK’s economy is expected to expand by 1.6% in 2018. American investment bank Morgan Stanley estimates that the UK’s GDP will grow by only 1.1% in 2018.

Asian economic outlook is positive

Gross Domestic Product, GDP, Economic Growth

China had set itself a target of doubling its GDP between 2010 and 2020. If it is to achieve this, it needs to clock an average growth rate of 6.3% in the next three years.

According to Wang Tao, head of China economic research at UBS Group AG in Hong Kong, the country is on track to meet this target. However, there are several obstacles to be overcome. Chinese companies may find it more difficult to raise money. Over US$1 trillion in corporate bonds are due to mature in 2018 and 2019. Interest rates are on the rise and roll over financing will be more expensive.

Inflation is also expected to rise. Factory inflation – the price of goods leaving the country’s manufacturing units – is expected to be 2.8% in 2018 compared to 1.6% estimated earlier. Consumer inflation is also expected to increase to 2.5% from 2.2%.

The IMF projects that China will grow at 6.5% in 2018, down from 6.8% in 2017. Overall, Asia will lead the world in economic growth with the region expected to increase its GDP by 5.5% in 2018.

US growth to slow down

Gross Domestic Product, GDP, Economic Growth

The US economy expanded at a steady pace in 2017. Employment numbers were robust, consumer demand increased, and corporate investments were up. The question is, can the US continue to report positive economic data quarter after quarter?

Andrew Sheets, chief cross-asset strategist at Morgan Stanley, expects the US economy to slow down in 2018. In the last two quarters, the GDP in the US has grown at an annualised rate of 3%. Sheets expects the growth rate to show a declining trend in the subsequent quarters.

Is there a possibility that the US is heading for a recession? Ellen Zentner, chief US economist at Morgan Stanley, says that there is only a 25% probability of this happening in the next 12 months. The investment bank recently revised its growth forecast for 2018 for the US to 2.5% from the earlier rate of 2.2%.

The bottom line

The general consensus among analysts seems to be that the global economy will continue to grow in 2018, although the pace of growth may be about the same or slightly lower than in the previous year.

Of course, geopolitical developments and conflicts could have an unforeseen and possibly negative impact on the world’s economy ­– and ­it is important for investors to be aware of the potential risks that exist in the global landscape.

It is also important to remember that the world’s largest economies are at different stages of the growth cycle, as Morgan Stanley points out in its report titled 2018 Outlook: Global Economies Keep Skating In Sync.

The report states that the US and China are in the late stages while “Europe and Japan are just reaching the halfway point, and many emerging markets are in the early innings….” This should ensure that the slowdown in some countries is offset by the increasing rate of growth in others.

SIGN UP