Top 10 economic predictions for 2018

The global economy finally broke out of the doldrums in 2017, putting to rest persistent fears of “secular stagnation.” The best performance since 2010 was the result of more rapid growth in the US, Eurozone, and Japanese economies. Emerging markets also contributed to faster global growth, as some of the worst-hit economies (e.g., Brazil and Russia) emerged from recession. Last December, we set forth our 10 predictions for 2017, download the report to see how well we did against the actual results.

What's coming in 2018

The stage is set for sustained solid growth in the world economy in 2018. We expect global growth of 3.2% in 2018, matching the growth rate of 2017 and well above the 2.5% rate of 2016. That said, the composition of growth is likely to change.

1. The US economy will sustain above-trend growth.
   The US economy began 2017 on a weak note, with a paltry 1.2% growth rate in the first quarter. Since then, growth has averaged nearly 3.0%. With the strong momentum at the end of the year, we expect growth in calendar year 2018 to be 2.6%, above the 2.3% in 2017 and well above the 1.5% in 2016.
2. Europe’s expansion will slow a little, but remain solid.
   The Eurozone economy has continued to surprise on the upside throughout 2017, and real GDP growth is expected to be 2.4%—the strongest since 2007. Most of the factors that helped growth in over the past year will also support growth in 2018.
3. Japan’s growth spurt will fade.
   Since the beginning of 2016, Japan has enjoyed seven quarters of uninterrupted growth—for the first time since the 1999-2001 period. Moreover, after three weak years, in 2017 Japanese growth quickened to an above-trend rate of 1.8%. While the economy will continue to grow in 2018, the momentum will ease relative to 2017.
4. China’s momentum will weaken.
   China’s economic stabilization in 2017 was mostly driven by government stimulus. Nevertheless, the fundamental problems of excess industrial capacity, debt overhang, and a housing glut have remained unresolved. The Chinese government will continue to address these problems through the ongoing “Supply Side Structural Reform” program.
5. The improved performance of the emerging world will be sustained.
   At 3.9%, emerging-market growth in 2016 was the weakest since the Great Recession. Since then, the external environment for these economies has improved. In particular, growth in the developed world has picked up considerably and commodity prices have risen by more than 60% since the beginning of 2016. As a result, emerging-market growth rebounded to 4.8% in 2017.
6. With the rally over, commodity prices will be range-bound and volatile.
   After surging around 44% in 2016, our IHS Markit Materials Price Index rose 17% in 2017. For a number of reasons, we see no big increases in 2018, and potentially a lot of volatility.
7. Upward pressures on inflation will remain muted.
   Over the past two years, the pattern of inflation in the world has been affected by puzzlingly low rates of price increases in the developed world and, at the same time, a surge in inflation in the emerging world. Recent evidence points to a (very) gradual increase in developed-economy inflation rates as output gaps continue to close, and as the disinflationary impacts of falling commodity prices dissipate.
8. The Fed will keep raising interest rates—some other central banks may follow.
   After the mid-December rate increase, the Federal Reserve is on track to hike interest rates another three times in 2018 (expected in March, September, and December). However, there is a chance that the Fed may raise interest rates more.
9. The US dollar will be pushed up a little more.
   After the rollercoaster ride of 2017, the dollar is likely to get nudged higher in 2018—although depending on political developments, volatility could also remain high. There are at least three reasons why the pressure on the dollar over the next year will be mostly upward.
10. With global growth momentum strengthening, and assuming no policy mistakes or “black swans,” the risks of a recession remain low.
    Since the global expansion is now stronger and more synchronized, and with muted inflationary pressures, derailing it would require a large shock. The list of such shocks is long, but the probability of the any of them doing serious damage in 2018 is low.

Download the Top 10 Predictions for 2018 and see how accurate we were in Top 10 Predictions for 2017: How Accurate Were We

Top 10 Predictions for 2018

Nariman Behravesh is the Chief Economist at IHS Markit. He most recently won the Lawrence R. Klein Blue Chip Forecasting Award>
Posted 14 December 2017