- World GDP growth should remain at +3.2% as in 2017 – the best performance since 2011
- Investment in Advanced Economies will be a key driver
Let the beat goes on
Everything comes to those who wait. Ten years after the worst financial crisis since 1929, growth has finally recovered in 2017. This year should see similar growth and comparable drivers.
So what’s the difference? At the beginning of 2018, we all know (corporates, households, governments) that this year will be about good growth, again the best perfromance since 2011 to +3.2%.
This is a key change from one year ago when the news was all about policy nudges and the glass ceiling limiting growth levels.
Why such a recovery? A pessimist would say this is because we experienced no global shocks over the last two years despite the risky accumulation of debt over the last decade – when economic performance was overall mediocre.
In some ways this is true. Insolvencies, for example, have risen among big corporates which benefitted the most from Central Banks asset purchases (see page 7 for a special focus on insolvencies).
An optimist could claim that things are radically different from 2016. Growth is above trend in three key ways: trade, investment and a growing number of Emerging Markets are now overachievers.
But, as the risk appetite is mopping up in the real economy and policy is pushing to go one bridge further, beware that things do not go one bridge too far.
Trade and growth live together
Trade growth was back in 2017, with many one-off aspects driven by a price recovery fueled by the oil price rebound, but also some volume growth acceleration.This virtuous circle had positive spillovers on GDP growth in the most open economies in Asia as well as in Eastern Europe.In 2018, world trade is set to grow faster than GDP for a second consecutive year, a return to a pattern unseen since 2011. In volume terms, trade should rise by +3.9% compared to +3.2% for GDP growth.
Why the comeback? Troublemakers turned into cycle makers again. This is particularly true for China, since growth increased in 2017 to +6.9% (from +6.7% in 2016), the first such acceleration since 2010. What about imports? These grew by +7.2% in volume terms. This added demand for other Asian economies, as well as commodity exporters in the region, in Latin America and in Africa. As a result, highly open economies were among the best growth performers.
This momentum might ease in 2018. But open economies will keep their lead vis-a-vis countries with comparable income levels. South Korea is forecast to grow by +3% while France should advance by +1.9%. Poland should post +3.7% while Russia is estimated to expand by +1.9%. And Spain with +2.4% should perform better than Italy with a mere +1.3%.
Investment in Advanced Economies: Let’s go party
The Eurozone and Japan got back to higher growth in 2017, much like the US and China had done earlier. That was one (small) step for them, one giant leap for the World Economy. Growth across all key economies means fewer issues of slack - a measure of the quantity of unemployed resources - or high inventories.
This is because there are no remaining major weaknesses when it comes to demand drivers. Definitely, the risk of deflation is over.The usual (missing) link between unemployment and wage inflation should make a comeback, but not in the immediate future.
This means that corporates are benefiting from growing turnovers (+4.4% y/y in Italy in Q3) without one per one pass-through to wages. Goodbye balance sheet recession, hello balance sheet reflation, and supportive low credit costs.
As a result, after a long period of underinvestment, 2018 will be the second year in a row to see above trend investment growth. Corporate investment, for example, will grow by +4.7% in the US. A catch-up effect is a pervasive driver. This is particularly true in France where the “lost decade” of corporate investment means a EUR 40 bn gap that will be hard to close.
Yet booming growth can help to lower or eliminate slack. Capacity utilization rates returned to pre-crisis levels (87.2% in Germany and 85.4% in France during Q4). As household investment is also facing a good year in 2018 (e.g. +3.6% in Germany), the story holds for private investment as a whole and is supportive for related sectors (particularly capital goods and metals).
Table 1 Growth forecasts