There are eight broad drivers of our global macro outlook until 2019, and longer term. These inform our analysis and the macroeconomic forecasts of individual countries.
1) Advanced economies such as the US, Germany and Japan, which are at or close to full employment, will see a mild increase in their inflation rates at the end of 2018, as the unemployment rate continues to push below the NAIRU 1, or the level below which wages and prices rise.
2) In other advanced economies, particularly in the euro area, a strong, broad-based cyclical recovery has taken hold, supported by exceptionally loose monetary policy that continues to fuel an acceleration in credit growth. We expect economic activity in these economies to be maintained over the next two years, supporting an expected gradual reduction in monetary policy support. Inflation rates will remain weak. The UK's growth outlook remains highly uncertain, and is contingent on the outcome of Brexit negotiations with the EU. Our baseline forecasts are unchanged from the previous outlook. We expect the UK economy to continue to slow over the next few quarters due to the negative impact of the prevailing uncertainty on investment.
3) Cyclical recovery will pick up pace over the next two years in a number of emerging market countries, including South Africa, Brazil, Mexico and Argentina. Current economic conditions are particularly favorable for a number of emerging economies with the combination of strengthening global growth and manageable inflation, allowing for relatively easy monetary policy. In Latin America, growth is slow, but accelerating. We expect most emerging market countries in Asia to maintain their current pace of growth, despite a slower pace of expansion in China. We do not expect China to exert a significant drag on global growth prospects over the rest of 2017, 2018 or 2019. although any significant acceleration of the authorities' deleveraging campaign would be negative for headline growth.
4) A number of emerging market countries are scheduled to hold general or presidential elections over the next two years. In Brazil and South Africa these are crucial, as they could bring much-needed stability to the political economic system.
5) The era of expanding central bank balance sheets is ending. But central banks will maintain a significant presence in financial markets for some time. We believe that the current approach adopted by key central banks, which includes ample early communication and gradualism, will continue to guide financial market sentiment, thereby supporting financial sector stability.
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6) Although the global economy is accelerating, the scope for effective monetary policy action in the event of a future negative shock is limited. This is not only because interest rates and inflation remain at all-time lows. Unconditional political support for unconventional monetary policy measures may be difficult in the current political climate in the US and the euro area. On the one hand, high leverage limits the ability of policymakers in advanced economies to engage in countercyclical fiscal measures. On the other hand, low real interest rates have increased the affordability of debt-financed fiscal measures.
7) We expect lower potential growth in most advanced and emerging market countries, notwithstanding the bullish short-term outlook. A key determinant of longer-term growth is labor productivity. In economies with aging populations, a significant rise in productivity would be needed to maintain strong growth. The widespread expectation of low long-term potential growth is rooted in the view that structural factors are likely to hold down trend productivity growth. While this view is incorporated in our forecast, we also recognize that technology as well as productivity enhancing policies have the capacity to boost productivity growth for individual countries. Technological innovations in the fields of artificial intelligence, robotics and machine learning have the potential to raise productivity. But whether these enhance productivity, growth, wages and standards of living, or whether they prove to be major disruptors, remains to be seen.
8) A rise in inequality in terms of both wealth and income distribution has fueled political discontent in the existing global economic order and enhanced the appeal of populist policies in advanced economies, including the US, UK and the euro area. If benefits from growth continue to be distributed unevenly, disruptive populist politics could gain further prominence. A disruption to trade flows and the global supply chain in case of conflict on the Korean peninsula, a broad-based asset price correction and a faster-than-anticipated slowdown in China also present downside risks to our growth outlook.
Prospects for emerging market countries have brightened with firming global demand
With stable growth in the world's largest economies, prospects for many emerging market countries are also looking up. Macroeconomic fundamentals in major emerging economies are supportive, particularly in terms of manageable current-account balances, adequate foreign exchange reserves and benign inflationary pressures. Ongoing cyclical economic improvement continues to be reflected in leading indicators, sentiment indicators, trade flows and industrial production across countries and regions. Still, growth outlooks for emerging market countries remain differentiated, depending on short-term business cycle dynamics as well as underlying growth potential of each country. Among the G20 emerging market countries, Brazil, Mexico, Argentina, Saudi Arabia and South Africa are currently experiencing a cyclical acceleration in economic growth. We expect growth to continue to consolidate further in these countries in 2018 and 2019. Russia, which like Brazil also emerged from a recession this year, is expected to grow at a steady rate of 1.5% over the next three years. We believe that growth momentum in Indonesia will remain stable at slightly over 5%. Turkey's economy, which has in large part been supported by government spending, will likely slow over time in spite of an improving global backdrop, as private sector confidence remains low. The course of NAFTA renegotiations is crucial for Mexico's growth outlook. Our current forecasts assume that the free trade agreement will be successfully renegotiated with minor changes.
A number of emerging market countries are scheduled to hold general or presidential elections this year. In Brazil and South Africa these are crucial, as they could potentially bring much-needed political and economic stability.
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