Global growth has strengthened
World economic growth consolidated in late 2017 at a solid rate of 1% QoQ, reflecting improved results in all major regions and showing signs of continued growth over the coming quarters. Our forecasts point to global growth slightly accelerating the next two years by around one basis point to 3.8% per year. This represents an upward revision of 0.3% relative to our expectations three months ago in response to higher growth in the U.S, China and the Eurozone in 2018. This is mainly due to more buoyant economic activity and ongoing support from monetary and fiscal policies.
In Latin America, we expect a somewhat stronger recovery this year, due to the upward revision of global demand and higher commodity prices. There are political risks that could weigh on economic confidence and financial markets. These uncertainties are however less significant than three months ago. Investment spending has gained traction with support from increased global demand and an upturn in international trade, allowing a recovery of the industrial sector. Private consumption has gained momentum and remains strong.
In China, we expect growth to moderate going forward, albeit to a lesser extent than in our previous Outlook. The factors underpinning this scenario remains unchanged: less support from economic policies, a more prudent monetary policy, regulatory tightening, the end to industrial over-capacity and a less expansionary fiscal policy. Nevertheless, the withdrawal from a strict growth target suggests a greater focus on the reduction of structural imbalances, which will boost potential growth. We now forecast that GDP will slow to 6.3% in 2018 (0.3% higher than three months ago) and to around 6% in 2019.
For Europe, the favorable economic sentiment could be prolonged, though it will be difficult to maintain the current growth pace – clearly above potential. Recent figures, along with an increase in global demand and less uncertainty, have led us to revise up our GDP growth forecast for 2018 by 0.4pp to 2.2%, while we estimate growth at 1.8% for 2019. We are increasing our headline inflation forecast by 3pp to 1.5% for 2018 and to 1.6% for 2019. Regarding inflation, we continue to project a gradual increase in 2018 and in 2019, driven by strong domestic demand, a healthier labor market and the reduction of spare capacity.
Increased growth and higher demand have been accompanied so far by subdued inflation, despite the expansionary
measures adopted by major central banks and the gradual reduction in idle capacity in developed economies. Doubts
remain as to whether factors underpinning the weakness of inflation are transitory or permanent. Continued economic growth and higher oil prices should push inflation up in the short-term, facilitating advances in the normalization of central bank policy in developed economies.
In the absence of adverse global economic shocks, market fundamentals have continued to support risk-taking by
investors. In particular, the upbeat economic environment has supported still accommodative monetary conditions, which has helped to maintain record-low volatility in financial markets. Yet, this is leading people to question whether certain assets are overvalued, including equities in developed countries, which have maintained an upward trend.
With respect to monetary policy, there have been no surprises. The strong pace of growth is validating monetary policy normalization in developed economies. This positive outlook has also triggered an upward revision of economic projections by the U.S. Federal Reserve and the European Central Bank (ECB).The ECB will reduce quantitative easing in 2018, but with an approach that differs from the Fed Balance Sheet Normalization Strategy, which is underway. Asset purchases have been reduced substantially, but the program has been extended at least until September 2018. In this setting, the ECB is maintaining its commitment not to raise interest rates until sometime after the end of quantitative easing, suggesting interest rate will not be raised until 2019. Other central banks, such as the Bank of England and the Bank of Canada, are taking steps in the same direction (with one-off interest rate rises). The Bank of Japan has maintained its monetary policy, although it has slowed its asset purchases in line with major central banks. Financial markets will have to adapt to a more“normal” monetary environment.
BBVA Research – United States Economic Outlook (1st Quarter 2018)