November 18, 2017

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Economic Watch: Global Growth Expected to Hit 3% in 2018

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November 13, 2017

By Evan Lockridge

Global outlook for gross domestic product growth rates, 2017-2027. Graphic: The Conference Board

Global outlook for gross domestic product growth rates, 2017-2027. Graphic: The Conference Board

After exceeding expectations in 2017, the global economy is projected to continue its current momentum to generate a 3% growth rate through 2018, according to The Conference Board’s latest Global Economic Outlook.

The non-profit, private research group’s analysis provides projections for the output growth of the world economy, including 11 major regions and individual estimates for 33 mature and 36 emerging market economies for 2018–2022 and 2023–27.

“Global growth has finally left the starting gate since the global economic and financial crisis,” said Bart van Ark, chief economist of The Conference Board. “GDP (gross domestic product) growth, which we predicted to grow at 2.8% [annually] a year ago, is likely to end at about 3% for 2017, and through 2018.”

While the growth path of mature markets will remain solid in the short term, potential for much faster growth is limited, and a growth slowdown is likely to set in later in the decade, according to the report.

“As some major emerging markets are maturing themselves, especially China, they are unlikely to return to growth trends of the past,” said van Ark. “The good news is that a larger role for qualitative growth factors; an improvement in labor force skills, digitization, and especially stronger productivity growth; may help sustain growth and provide better conditions for businesses to thrive over the next decade.”

Momentum in mature economies increased during 2017, which sets them up to continue growing at a decent pace in 2018 compared to the previous five-year average of 1.8% (2012–2017).

Mature economies are projected to grow by 2.1% in 2018 compared to 2.2% in 2017. The U.S. economy will especially benefit from carrying stronger investment growth into next year. By the middle of 2018, several European economies may see some weakening of cyclical tailwinds and fall back to their medium-term growth trend. These slowdowns will mostly be quite modest. On the other hand, Japan and the United Kingdom are projected to slow more dramatically next year.

Emerging markets will continue to gain some strength in 2018, projected to grow by 3.8%, compared to 3.7% in 2017, but there are significant differences across countries.

China had somewhat stronger growth in 2017 than anticipated, due to a revival in exports and ample government support of the economy in the run-up to the once-every-five-year Party Congress in October. But China will continue its long, soft fall going into 2018.

India, which had a weaker-than-expected year due to implementation difficulties with major policy initiatives, such as the demonetization of large currency notes and the introduction of a country-wide goods and services tax, will see improved growth in 2018, largely driven by consumption.

Brazil will continue to recover slowly from a deep economic crisis, while Mexico is likely to face more headwinds from uncertainty around the North American Free Trade Agreement negotiations and domestic policy uncertainty related to upcoming elections in 2018.

The Conference Board warned that several factors may limit the period during which the current strength in the global economy may continue:

  • The growth uptick in 2017 reflects a combination of unique events, including the stabilization of energy and commodities prices, improved business confidence based on hopes for fiscal stimulus and tax reforms by the new U.S. administration, a cyclical recovery in Europe, and China’s policy-driven growth stimulus. These events are unlikely to provide sustained growth going forward.
  • A less-than-convincing recovery in investment may limit the speed with which technology can be translated into productivity growth.
  • A slowdown in consumption growth is possible in several countries, as real wage growth remains slow, even as labor markets tighten.
  • Global trade growth may remain modest at best in light of a shift in growth toward less trade intensive categories of services, such as retail and personal and government services, causing a slower medium-term growth path, especially for emerging markets.
  • Policy and geopolitical risk may also distort the growth path in 2018. Some of those risks are related to domestic policy, especially in the United States, India, and China. Others are more geopolitical and geo-economic in nature, related to a possible fallout from dragging negotiations on Brexit and other threats to Europe’s stability, an acceleration in protectionism or even a trade war between the U.S. and China, and increased risk of political or even military conflicts in different parts of the world.

Long-term economic trends and structural changes pose even bigger risks in the global economy, according to The Conference Board. It said slow labor force growth due to aging populations, troubles with translating technology into productivity, and unequal distribution of the benefits of technological change have limited the potential size of the economy. Also, unfavorable corporate tax regimes and business regulations may be additional structural factors hindering business investment.

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