"The lack of global inflation in the face of positive growth surprises is allowing exceptionally accommodative global monetary policy settings to co-exist with strong growth outturns and prospects. However, caution is warranted on how long this combination can persist. Beyond 2018, it seems highly likely that global growth will moderate, while monetary policy conditions will tighten," said Brian Coulton, Fitch's Chief Economist.
In advanced economies, financial conditions remain very supportive, the drag from fiscal policy tightening has gone, and the investment cycle is firming up. Meanwhile, tight labour markets are bolstering consumer confidence and household spending. US growth should rise next year in response to tax cuts and accelerating private investment while better incoming data has led us to revise up our estimate of 2017 US growth to 2.3% from 2.1%. Eurozone growth now looks likely to be sustained at well-above-trend rates for at least a few more quarters, implying substantially faster growth in 2018 than previously expected - we have revised next year's forecast to 2.2% from 1.8% as the recovery proves more powerful and durable than anticipated.
China's slowdown is likely to be only modest, while the stabilisation in commodity prices is helping emerging markets (EMs) outside China to continue to recover from the sharp downturn in 2015. China's economy is likely to slow in 2018, but the slowdown is expected to be relatively modest with growth easing to 6.4% from 6.8% this year. EM growth has recovered to an estimated 5.1% in 2017 from 4.3% in 2016. The demand rebound in China, stabilisation in global commodity prices, and recovery in world trade all played a part. External conditions are likely to remain favourable for EMs next year and EM growth is expected to edge up to 5.2% in 2018 as recoveries in Russia and Brazil strengthen and India picks up somewhat after temporary factors dampened growth in 2017.
Monetary and credit conditions remain highly accommodative despite recent shifts in the global monetary policy narrative. Recent rate hikes by the Fed, the Bank of England (BOE) and the Bank of Canada have been a surprise relative to market expectations prevailing at the turn of the year but have failed to result in any significant tightening of global credit conditions. Three offsetting factors look to have been particularly important here: the ongoing easing by the European Central Bank (ECB) is likely having global impact (the Bank of Japan also continues to expand its balance sheet very aggressively); medium-term interest rate expectations in the US remain remarkably low and commercial bank credit standards have eased.
The pick-up in GDP growth in the advanced economies looks increasingly likely to boost investment, where traditional "accelerator" forces on investment growth will start to be felt as companies strive to expand the capital stock in response to stronger demand.
"The investment cycle is stirring. Improvements in business sentiment have become well-entrenched and there now appears to be a distinct absence of a looming threat to near-term growth that has dogged financial and business confidence over the last few years," added Coulton.
An improving investment outlook has been the main driver of our upward revision to Eurozone GDP growth in 2018, and we have upgraded our projections for private investment in the US next year. The UK stands in contrast, with recent business surveys of investment intentions pointing to weakening investment in the face of Brexit uncertainties. Nevertheless, UK growth forecasts have been revised up slightly to 1.6% in 2017 and 1.4% in 2018 on the back of incoming data and a looser fiscal policy stance.
Beyond 2018, however, we believe reality checks await. In particular, current growth in the advanced economies is well above potential, with the implication that output gaps are closing quickly. This is corroborated by declining unemployment rates. On the basis of our latest forecasts, output gaps will be in positive territory across all the advanced countries except the UK by 2019. Even allowing for uncertainties in real-time estimates of the output gap, this is bound to prompt a shift in central bank attitudes towards monetary policy. This can already be detected in recent moves by the Fed, the Bank of Canada and the BOE, which have all referenced low unemployment rates and/or diminishing spare capacity in recent tightening moves.
Given the potential for further upside to growth, particularly if the private investment cycle accelerates sharply or fiscal policy is eased more aggressively than we anticipate, it would inevitably bring with it an elevated risk of faster monetary policy tightening. This is a risk that could transpire even without stronger growth. Low unemployment rates and increasing anecdotal reports of labour shortages could result in a faster-than-expected pick-up in wage inflation. As this would substantially increase the risk of ongoing increases in CPI inflation, central banks would be forced to respond.
The possibility of a further escalation in Saudi Arabia-Iran tensions could lead to a sharp rise in oil prices, which would be hard for central banks to ignore in the context of rapidly diminishing economic slack. Other risks to world growth include disruptions to global trade, China's medium-term debt challenges and the risk of a renewed widespread appreciation of the dollar.
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