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Four reasons why 2018 will be the economy’s best post-crisis year

Posted by Oxford Economics on Dec 7, 2017 11:15:23 AM
 We head into 2018 in a fairly optimistic mood. The current global economic upswing is more broadly based than any other since the global financial crisis, and – unusually, by recent standards –  the new year approaches without any major crisis looming.

In our latest forecasts, we see world GDP growth accelerating from 2.9% this year to 3.2% in 2018. This would mark the best year for the world economy since the rebound from the global financial crisis began.

There are four key reasons why 2018 is going to be a good one globally:  strong trade growth; muted inflation keeping monetary policy accommodative; emerging markets staying robust; and general economic resilience to political uncertainty.

For financial markets and investors, broad-based global growth augurs well for global corporate earnings. Extended earnings cycles should, in turn, support valuations at expensive levels while helping under-performers catch up.

Subdued inflation dynamics mean no rout in core bond markets, though limited repricing higher in yields is likely. A soft dollar in such a goldilocks environment will be a further boost. The world of credit contains notable risks, meanwhile. For markets generally, we expect more volatility and smaller returns in the coming year.

In terms of the macro-economic outlook, the near-term risk of an abrupt slowdown in China looks limited, while the Eurozone economy continues to demonstrate robust growth underpinned by strong fundamentals.

In the US, a potential fiscal loosening, a weaker dollar and a business investment revival bode well. And the outlook is bright for economies that are heavily integrated into global manufacturing supply chains or reliant on commodity exports.

Granted, soaring debt is a cause for concern, particularly in some emerging markets, along with high asset price valuations. These warrant close monitoring and are plausible triggers for the next global slowdown.

Nonetheless, such risks could linger or indeed escalate further before correcting but we do not see that as a 2018 issue.

The most obvious trigger for any such correction would be a widespread and more aggressive monetary policy normalisation. However, in our view, inflation pressures look set to build only slowly. Add the fact that high debt will make the economies more sensitive to interest rate moves and we expect central banks to normalise with caution and see policymakers doing less tightening that the consensus expectation.

In asset markets, valuations – especially in equities – remain unequal, which continues to bode well for underperforming developed markets (DMs) and emerging markets (EMs).

With financial cycles advanced relative to business cycles, volatility could be higher next year as overshot expectations adjust to expensive markets like the US. But we do not expect such volatility to result in a large sell-off leading to a bear market.

Core fixed-income markets are likely to see a modest repricing higher in long-end yields. High-beta fixed-income markets, notably high-yield debt in developed economies, are at risk from tighter monetary policy and limited scope for spread compression to cushion the impact of higher core rates.

We see emerging markets remaining in a good place in 2018, despite a moderate slowdown in China. A combination of stronger growth and smaller vulnerabilities means that EMs are not at risk from moderately higher core yields, insofar as they are a reflection of global reflation.

Read our analysis of the outlook and key themes for the world economy in 2018 

Find out more about prospectsfor financial markets and investors next year

Topics: Global economics, Business and economic outlook, Forecasts

   

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