Central banks, trade threaten 2018 status quo
LONDON: After a year of relatively healthy global economic growth, economists are predicting pretty much the same for 2018 – a neither too-hot nor too-cold Goldilocks scenario, but with little sight of the three bears.
The idea is that all is pretty much on track for growth that will be stronger than in 2017.
Part of this may come from the fact that forecasters generally got it wrong last year, underclubbing this year’s economic performance, particularly for the euro zone and Japan.
The International Monetary Fund, for example, saw 2017 global growth at 3.4 per cent with advanced economies advancing 1.8 per cent. It now reckons them at 3.6 per cent and 2.2 per cent.
It had the euro zone and Japan growing 1.5 per cent and 0.6 per cent, respectively. It now has them at 2.1 per cent and 1.5 per cent.
“Faster growth is reaching roughly two-thirds of the world’s population,” the IMF said in a December blog post.
This performance has made some economists optimistic. Nomura is among the more bullish: “Global
Faster growth is reaching roughly two-thirds of the world’s population. IMF
growth has far more self-reinforcing characteristics at present than at any time over the last 20-30 years.”
But Goldilock’s bears do have a habit of showing up. There are huge numbers of potential political and economic risks to the status quo. But as in the fairy tale, let’s go with just three: central banks, trade, and bubbles.
In the first case, the danger is that there will be a policy mistake, squeezing debtors.
The second relates to renewed US protectionism or anger over Chinese exports triggering tit-fortat, growth-stifling trade barriers.
The third is about sudden market losses that dry up spending and demand.
Part of 2017’s global economic success was put down to a combinationof extraordinarily-loose monetary policy and competent management by central banks of their attempts to wean the world off such largesse. Entering 2018 the US Federal Reserve is lining up for three more hikes, the European Central Bank is slowly cutting back on its asset purchases, and China is increasing rates.
All of this is being carefully flagged by the policymakers, but mistakes can happen and any significant shift of gear could cause a sharp retrenchment in consumer and corporate spending.
The amount of US corporate debt outstanding, for example, is nearly US$8.8 trillion, according to Sifma, the US securities industry group.
That is up 35 per cent since 2010 and a major driver behind corporate expansion.
“Financial stability risks pose a bigger threat to the continuation of the (growth) cycle than price stability risks,” Morgan Stanley co-head of economics Chetan Ahya wrote in a 2018 outlook, saying US corporates were the most exposed to higher interest rates.