World Economic Outlook Update, January 2018

World Economic Outlook Update, January 2018

World Economic Outlook Update, January 2018, Last Modified, 0000-00-00

Global economic activity continues to firm up. Global output is estimated to have grown by 3.7 percent in 2017, which is 0.1 percentage point faster than projected in the fall and 1/2 % percentage point higher than in 2016. The pickup in growth has been broad based, with notable upside surprises in Europe and Asia. Global growth forecasts for 2018 and 2019 have been revised upward by 0.2 percentage point to 3.9 percent. The revision reflects increased global growth momentum and the expected impact of the recently approved U.S. tax policy changes.

The U.S. tax policy changes are expected to stimulate activity, with the short-term impact in the United States mostly driven by the investment response to the corporate income tax cuts. The effect on U.S. growth is estimated to be positive through 2020, culminating to 1.2 percent through that year, with a range of uncertainty around this central scenario. Due to the temporary nature of some of its provisions, the tax policy package is projected to lower growth for a few years from 2022 onward. The effects of the package on output in the United States and its trading partners contribute about half of the cumulative revision to global growth over 2018-19.

Risks to the global growth forecast appear broadly balanced in the near term, but remain skewed to the downside over the medium term. On the upside, the cyclical rebound could prove stronger in the near term as the pickup in activity and easier financial conditions reinforce each other. On the downside, rich asset valuations and very compressed term premiums raise the possibility of a financial market correction, which could dampen growth and confidence. A possible trigger is a faster-than-expected increase in advanced economy core inflation and interest rates as demand accelerates. If global sentiment remains strong and inflation muted, then financial conditions could remain loose into the medium term, leading to a buildup of financial vulnerabilities in advanced and emerging market economies alike. Inward-looking policies, geopolitical tensions, and political uncertainty in some countries also pose downside risks.

The current cyclical upswing provides an ideal opportunity for reforms. Shared priorities across all economies include implementing structural reforms to boost potential output and making growth more inclusive. In an environment of financial market optimism, ensuring financial resilience is imperative. Weak inflation suggests that slack remains in many advanced economies and monetary policy should continue to remain accommodative. However, the improved growth momentum means that fiscal policy should increasingly be designed with an eye on medium-term goals, ensuring fiscal sustainability and bolstering potential output.

Multilateral cooperation remains vital for securing the global recovery. The economic outlook for the euro-zone remains challenging, and we anticipate GDP growth to slow to 1.3% in 2017. The upcoming key elections in major EU Member States and the related uncertainty may inhibit growth in the first half of 2017. Assuming that the political risks will not materialise, we expect the economy to gain momentum in the second half of 2017 following a significant upswing in the U.S. economy, potential fiscal easing and the supportive monetary policy stance of the European Central Bank (ECB). In December 2016, the ECB announced that it was extending its asset purchase program by nine months through to the end of 2017. Though, it plans to reduce its monthly purchases to €60 billion from April 2017. We anticipate consumer prices to rise by 1.4 % in 2017. After 2016 GDP growth of 1.9 %, we expect the German economy to expand by 1.1 % in 2017, driven solely by the domestic economy. Approximately half of the slowdown will be due to the fact that there are fewer working days.

Update: The Eurosystem currently reinvests principal payments from maturing securities purchased under the asset purchase programme (APP). The period of APP net asset purchases ended in December 2018. source ecb.europa.eu

We expect economic growth in the U.S. to accelerate to 2.6 % in 2017. We expect the dampening effect of low oil prices on the energy sector, inventory reduction and growth-hampering net exports to gradually subside as the trade deficit has widened recently. The combination of tax cuts, deregulation and infrastructure investments announced by the new administration in the U.S. could boost growth significantly, particularly in the second half of 2017. We expect consumer prices to rise by 2.1 %. The Federal Reserve's monetary policy should provide further stimulus for the U.S. economy overall. We expect that the Fed will hike its policy rate three times to 1.375 % by year-end 2017.

We expect the Japanese economy to be driven primarily by domestic growth in 2017 and it appears to expand at a slightly quicker pace than in the prior year at 1.1 %. We anticipate that this should continue to be buoyed by the country's monetary policy. Update: The GDP of Japan advanced 0.3% near the end of 2018 compared to the prior year. GDP Growth Rates in Japan averaged 1.98 percent from 1981 until 2018, reaching an all time high of 9.40 percent in the first quarter of 1988 and a record low of -8.80 percent in the first quarter of 2009 according to Trading Economics.com.

The Bank of Japan is focused on controlling the yield curve, and the pace of monetary expansion is expected to slow. We expect inflation to be at 0.6%. We project economic growth in the emerging markets to rise to 4.6% in 2017 and that in Asia (excluding Japan) to remain more or less flat at 5.9 % with inflation at 3.0 %. We expect the Chinese economy to expand by just 6.5 % in 2017, with inflation increasing to 2.5 %. However, this assumes an additional rise in lending, which adds to the risk of a real estate bubble and rising capital outflows. The People's Bank of China could expand the supply of credit to bolster the real estate sector.

We do not expect it to adjust its key interest rate in 2017. The inherent uncertainty in our global forecast remains relatively high due to numerous risks. The reaction of the global financial markets could be far more negative than assumed if the upswing anticipated from the new U.S. administration fails to meet expectations or if it reverts to protectionist policies. Which it appears to be doing... On the other hand, an upturn in the U.S. economy could cause interest rates to rise more sharply than assumed.

Slower US growth means no rate rise for 2019, says Fed - The US Federal Reserve does not expect to raise interest rates for the rest of 2019 amid slower economic growth. After a two-day meeting, monetary policymakers voted unanimously to keep the US interest rate range between 2.25%-2.5%.

This could have a negative impact on households and corporate expenditure worldwide and could result in much higher capital outflows from emerging markets. Likewise, a hard landing in China could trigger global upheaval. Moreover, geopolitical risks could escalate, especially those arising from conflicts in the Middle East. In Europe, an unstructured exit of the United Kingdom from the European Union, a flare-up in the debate on monetary policy going forward and the future of the eurozone, a halt in implementing structural reforms or increasing support for populist parties could potentially have a substantial adverse effect on our forecasts. Regional independence efforts remain a challenge for the stability of the European Union. Also, another refugee crisis could further exacerbate the political discord in the European Union.

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