The pickup was most notable in the eurozone, where GDP growth came in at 2.6% in the third quarter while accelerating to just 2.3% in the US. The Chinese economy grew by 6.8%. However, growth engines are still not firing on all cylinders: they are highly dependent on China’s economic policy, US interest rate trends and the ability of the eurozone and Brazil to catch up with the other main regions.
Although President Xi Jinping reiterated the importance of keeping China’s GDP growth at a fairly robust pace in coming years, thereby ensuring that the People’s Republic remains the unchallenged leader, a slight deceleration is probable due to the government’s efforts to curb private debt. In Europe, the pace of growth will be hit by the euro’s 8% appreciation between April and August 2017. Moreover, 2018 is likely to be the year in which the eurozone’s GDP returns to the level it should have reached had it not been for the financial crisis and recession. That means the potential growth rate should little by little slow to close to 1.2% despite the ECB’s persistently ultra-accommodating stance. We now expect the eurozone economy to expand by 1.8% in 2018 and 1.6% in 2019. Only the US could see growth accelerate further in 2018 thanks to tax cuts. As a result, we still expect the US to grow by 2.5% in 2018, up from 2.1% in 2017, and that could underpin the US dollar appreciation cycle. Global economic growth could therefore stabilise in 2018.
Inflation should stay tame in developed countries. Consumer spending is being reined in by weak wage growth, the result of low productivity gains. And Asia is still burdened by overcapacity while, more generally, innovations are not spreading quickly enough to production processes. At the same time, household consumption disappointed in 2017. In the US, it increased at the same rate as in 2016 even though the national savings rate dropped to 2.9% in November (Bureau of economic analysis), a 10-year low. In the eurozone, household spending slowed to 1.8% in early 2017, down from 2% in 2016 according to Eurostat. UK consumer spending grew by 1.8%, also thanks to a decrease in the savings rate. In China, although private consumption now accounts for 40% of GDP (up from 35% in 2010), retail sales only rose 10.3%, compared with 10.4% in 2016 (National Bureau of statistics of China).
Inflation should stay tame in developed countries.
As long as wage growth is held back by low productivity gains, demand growth will remain sluggish and there will be limited upside for an acceleration in economic growth. Only additional government spending on education and job training could boost the spread of innovations and help improve productivity, particularly in the services sector.
Meanwhile, central banks continue to forecast modest core inflation. Even the US Federal Reserve, which had already started to raise benchmark rates, revised down its long-term Fed funds forecast from 3% to 2.8% last September. This suggest it doubts the ability of President Trump’s policies to generate anything more than short-lived growth. Consequently, rate hikes should remain very gradual despite the ongoing “normalisation” of monetary policies. Central banks are set to go on controlling interest rates and “managing” asset prices.
Group Chief Economist
Edmond de Rothschild
Targeted growth estimates are based on market assumptions made by Edmond de Rothschild and in no way constitute a guarantee of actual growth levels.