We remain upbeat on the eurozone and expect Germany to remain a key driver with growth of 2.4% in 2018, well above the consensus forecast of 2.0%, albeit with a modest slowdown. This is offset by stronger growth in the US, thanks in part to the fiscal boost there. The two standouts are Japan and Switzerland, reflecting a more upbeat assessment on domestic demand prospects. There will be a gradual cooling in China, and this will be offset by stronger GDP growth in other emerging markets.
China contributed to around 70% of the initial pick-up in global trade growth in 2016 and early 2017. German exports to the rest of the eurozone and other European economies surged while exports to other markets such as Asia were weak. This supports the idea that slightly weaker Chinese GDP growth and imports need not trigger a substantial slowdown in global trade growth. The key message from our forecasts is that compared to the 2012 to 2016 period, the pace of global trade growth remains strong.
The winners from the continued strength of global trade will be those economies heavily integrated into global manufacturing supply chains. Those economies that tend to rely on exports to the US should fare well as it heads back to the top of the advanced economies growth table. But our continued optimism about the eurozone could also ensure that “emerging Europe” performs well.
A number of factors that have held down wage growth are likely to persist. One key puzzle is why wage growth remains weak, even in economies where unemployment has returned to pre-global financial crisis levels. A key factor appears to be that the share of workers on temporary or part time contracts has increased and average hours have fallen, implying that the headline unemployment rate understates the amount of labour market slack. Low productivity growth has also been an important driver of weak wage growth and this underlying trend looks set to persist.
Central banks are unlikely to come under strong pressure to tighten monetary policy to prevent inflation from overshooting. There may be a case for some central banks to tighten policy – for instance simple policy rules indicate that the Bank of Canada’s and Swedish Riksbank’s key policy rates should be higher. But both banks are heavily constrained by the policy stance of the Fed and ECB – the Taylor rule suggests that policy rates there are broadly appropriate.
Meanwhile, for those commodity exporters, such as Russia, Brazil and a number of other Latin American economies, forced into painful belt tightening in response to the commodity price weakness of 2015 and 2016, the ill effects on their economies should continue to wane.
We now appear to be in a low volatility world. However, for most, the perception of risk is rather different, reflecting the apparent surge in populism and geopolitical concerns.
Our quarterly risk survey suggests that geopolitical tensions (most notably concerning North Korea), US policy errors and a severe China slowdown are perceived as the three biggest concerns. However, while they warrant close monitoring, there is arguably no obvious reason to believe that any of these risks are on the verge of crystallising.
There are several political events that could upset the apple cart, particularly in Europe. But perhaps one lesson learned from the last couple of years is that the domestic economic costs of political uncertainty are often overplayed and the regional and global spillover effects are typically far from disastrous.
Even in eurozone financial markets contagion has been very limited with any spikes in government bond spreads short lived. While we acknowledge that political factors pose some downside risks to the European economy, our baseline view is that all the economies at the centre of these uncertainties – the UK, Italy, Spain and to a much lesser extent Germany – as well as the region more generally, will stage stronger GDP growth than the consensus expectation.
Ben May is director, global macro research, at Oxford Economics