Unemployment rate in G7 to hit a 40 year low: In 2018, the aggregate G7 unemployment rate is on course to hit a rate below 5% - equivalent to about 19 million workers. We expect wage growth to post a modest uptick, but still to remain below pre-crisis trends. This could be driven by tight labour markets like in the US—which is expected to hit an unemployment rate of about 4%—but offset by other economies like Italy, where unemployment levels remain relatively high. Watch out also for the wage negotiations of important sectors in Germany in the last quarter of 2018.
Eurozone expected to grow faster than 2%, while UK lags: In our main scenario projections for 2018, we expect the GDP-weighted growth rate of the peripheral Eurozone economies to grow faster than the core. Specifically, we expect growth of around 2.5% and 2% respectively in GDP weighted terms1. This would be the fifth consecutive year the peripheral Eurozone economies have outpaced the core. Of the larger Eurozone economies (see Figure 2), the Netherlands is expected to lead the core economies’ scoreboard (2.5% growth). Ireland is expected to be the fastest growing peripheral economy (3.5% growth). Greece is likely to exit its bailout programme in August marking the first year since 2009 where no Eurozone economy is under IMF surveillance. Germany will continue to post the world largest current account in absolute terms to the tune of over $300 billion. By contrast with the recovering Eurozone, uncertainty relating to Brexit is expected to drag on UK growth, which is expected to be only around 1.4% in 20182.
Relatively stable oil prices: We expect average oil prices to remain broadly stable in real terms in 2018. In November, OPEC and its allies agreed to extend its 1.8 million barrels per day (mb/d) supply cut until the end of 2018. Though part of OPEC, Iran was permitted a lower cut, to 10.05mb/d, as it recovers from nuclear related sanctions. This is likely to keep oil output growth modest, provided the deal proves viable over time.We think risks are weighted to the downside due to the possibility of non-compliance and, in particular, US shale oil producers’ ability to increase supply rapidly. Specifically, US shale oil producers effectively drove the recent global oil glut, and increasing prices due to OPEC’s latest deal could incentivise US shale producers to increase their rig count.
Chinese growth to slow down in line with expectation: We project China, the world’s largest economy in PPP terms, to grow by around 6-7% in 2018. At the 2017 party congress, President Xi outlined China’s shift in focus from high speed to high quality growth. This was coupled with supply side reforms addressing structural problems, such as excess factory production and pollution. Any further, unexpected, reduction in Chinese growth (for example because of financial stability issues related to high debt levels in the property sector) is a downside risk. Our analysis shows that, looking at the trade linkages alone, Australia and South Korea could be particularly susceptible to any such slow down as exports to China make up a significant proportion of their trade.
Global population growth at slowest rate since records began in 1950: We expect the world will add an extra 80 million people to its population in 2018, but as a percentage increase this would be the slowest since 1950. The continents (as defined by the United Nations) of Asia and Africa are projected to be the major contributors, with 40 and 30 million people respectively. This is despite Africa’s current population size being less than a third of that of Asia. Africa’s dynamism will also be reflected in economic output - so it is unsurprising that eight of the ten fastest growing countries in 2018 could be in Africa.
While the growth outlook for 2018 looks good, there are also some other downside risks for business to bear in mind, including:
1. Core countries include Germany, France, Italy and Netherlands. Periphery countries include Greece, Spain, Portugal and Ireland.
2. For more details on the UK economy visit www.pwc.co.uk/ukeo/
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