Predictions for 2018: Let the good times roll

In our final GEW of the year, we outline key themes we think could prevail in the global economy in 2018.

Global economic growth on track to be the fastest since 2011: In our main scenario, we project the global economy will grow by almost 4% in purchasing power parity (PPP) terms, its fastest since 2011, adding an extra $5 trillion to global output in current value terms. More importantly, we expect growth to be broad based and synchronised, rather than dependent on a few countries. The main engines of the global economy - the US, emerging Asia and the Eurozone, which comprised 60% of world GDP in 2017 - are expected to contribute almost 70% of economic growth in 2017 in PPP terms compared to their post-2000 average of around 60%.
The beginning of the end of easy money: Since the Federal Reserve started to gradually reduce the size of its balance sheet and raise rates, the question has been who will follow next. We expect the European Central Bank (ECB) to further reduce its monthly asset purchases in 2018. If Eurozone inflation rebounds faster than our baseline projection, 2018 could see the end of the ECB’s asset purchase programme. In Japan, however, we don’t think there will be a dramatic shift in monetary policy. Generally, we expect monetary policy to somewhat tighten in the G7, reflecting closing output gaps in some advanced economies and stable inflation expectations.
Global economy biggest, most energy hungry ever: The global economy is on course to consume almost 600 quadrillion British Thermal Units (BTUs) of energy—double its 1980 level and the highest level on record. We expect India and China together will consume about 30% of global energy, which will be about six times more than what the African continent will consume. Reflecting the slow shift towards renewables, 10% of global energy consumption is expected to be in renewables with China consuming twice as much renewable energy as the US.

Our detailed predictions have been compiled with input from our global team of economists.

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:

The final agreed form of US tax stimulus leading to unsustainably large fiscal deficits squeezing financial conditions at an unexpectedly fast pace with wider spill over effects.
The handling of the Brexit negotiations as well as wider discussions about the future of the EU.
Political uncertainty in large economies as elections are held across Brazil, Mexico, Italy, South Korea and the US midterms as well as continued geopolitical tensions related to North Korea.

_{^{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/}}