2017 was certainly a surprising year for many. The global economy’s growth surpassed the expectations of even the most optimistic forecasters. It was aided by loose financial conditions, including equity markets reaching record highs, a lower-than-expected dollar and accommodative monetary policies in many major economies, apart from the US.
In addition, there were more supportive fiscal policies, low inflation and a strong global trade. The growth was broad-based and across developed and emerging markets. The momentum is expected to continue in the New Year.
Most major financial institutions converge in their expectations that the global GDP will rise by approximately 4%, up from 3.7% in 2017. Inflation will continue its slow upward trajectory, however, remaining below expectations, according to Goldman Sachs.
If inflation increases at a higher pace, then central banks may be more hawkish than expected and increase rates faster than anticipated. JP Morgan forecasts the global CPI inflation to increase by 2.5%.
Demand-side has circled around businesses as their profits increased in the past year, leading to increases in the global CAPEX. On the supply side, global productivity has picked up as well. In many developed economies, spare capacity is decreasing quickly. In southern Europe, however, many years need to pass before full employment is reached.
Progress of the US
Undoubtedly, 2017 was the year of the United States. When Donald Trump was elected president, many economists like Paul Krugman or market participants like George Soros predicted doom and gloom, saying that the recession and the fall of the stock markets would be so huge that they would never recover.
They could not have been more wrong. The stock markets have reached their highest levels ever. The Dow Jones has had record closes 70 times during the year. Unemployment is at a 17-year low, falling below 4%, while food stamps level reached their lowest levels in almost two decades. Furthermore, consumer confidence surged to a 17-year high as well, together with homebuilder confidence and public confidence in job growth.
Moreover, the market expectations for a tax reform were more or less met, prompting the stock market growth to continue further. In the first days of 2018, the Dow reached 25,000 points for the first time. According to the Fed, US household wealth rose by $1.7trn in the second quarter of 2017. Lastly, American corporations had their best earnings session in 13 years.
The Fed is expected to hike rates four times in 2018 continuing their normalisation of monetary policy. JP Morgan predicts a tightening of 125 bp of rates and a decrease of $400bn in its balance sheet. When considered globally, the rise in rates will be limited by the increase in the balance sheet in other major economies that are continuing with their QE programs. Due to this, the dollar will likely show signs of strengthening. It is expected to increase with respect to the Indian rupee and the Australian dollar, but remain lower than the Euro and the Japanese Yen and stable with respect to the Chinese yuan.
Growth in the Eurozone
In the Eurozone, the growth of the economy was 2.6%. The recovery continues steadily, albeit slowly. The ECB is divided with regards to the end date of QE, since inflation is not at its desired level.
However, the tapering process has already started. The banks have performed well although the negative rates hurt interest income, something that is unlikely to end in 2018. Yet, they have cut costs and increased fees.
Moreover, the number of loans they have given has increased. Lending is expected to continue rising in the New Year. The ECB economists, as Wall Street Journal reports, predict Eurozone economic growth for 2018 to be 2.3%, rates to remain unchanged and the ECB to continue buying bonds, although at a reduced rate of €30bn.
According to Bloomberg, confidence in the Euro area at the end of 2017 reached a two-decade high. The Euro-area economic confidence measure reached 116, above the median forecast 114.8 in a Bloomberg survey.
It has to be said that, in 2017, the turbulence in the Eurozone has not been economic or financial, but rather of a geopolitical nature. The crisis in Catalonia, Brexit negotiations and political elections coupled with a populist tide meant to shake-up the status quo has been a cause for distress that has, naturally, affected the stock markets.
All these are not one-time issues, but are likely to continue and persist in 2018 too. Will the stock markets be substantially affected by them, or have they developed an immunity to political troubles like in the US? This remains to be seen.
With respect to oil, it is expected to average $60/bbl, 10% higher than the 2017 average prices. The higher prices are due to higher global demand, supply restrictions in the energy market, hurricane-related stoppages in the US and financial disruptions in Venezuela among other factors. It is very likely that OPEC will extend the cuts of oil supply through mid-2019, helping keep the oil prices to these levels.
The expectations for 2018 are undoubtedly high. If it continues on the same path that it started, it may well be the best year in a very long time.
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