Vale 2017, hail 2018


Drew Klease - Principal Economist 

The global economy is currently enjoying a cyclical economic recovery, which QIC expects to extend into 2018. The improvement in global growth has been geographically broad based, with all major regions – US, Europe, Asia, Africa and South America – experiencing a pick-up in growth. In terms of the numbers, we forecast that global real GDP growth (in PPP terms) will improve from 3.2% in 2016 to around 3.6% in 2017, the strongest growth seen since 2011. We expect the momentum to continue into 2018, as growth lifts further to 3.7%, driven by ongoing fiscal stimulus, improving labour market conditions and accommodative monetary policy settings. Despite the improvement in growth, inflation is expected to remain subdued. A gradual pick-up in wage growth should start to push inflation closer to central bank targets in late 2018 and 2019 and neither a sharp outbreak in inflation nor a bout of disinflation is anticipated.

The US economy continues to be at the forefront of the global recovery. A turnaround in business investment and ongoing solid consumer spending has supported the economy over the past year and forward looking indicators suggest solid momentum should continue in 2018. The economy should receive a significant boost next year from the largest tax cut since the 1980s, worth around $1.5 trillion over the next decade. Both consumers and business will face a much lower tax burden and our calculations suggest that the package will lift real GDP growth by around 30-40 basis points in both 2018 and 2019. Overall, we expect real GDP growth in the US to pick-up from 2.2% in 2017 to an above-trend rate of 2.6% in 2018.

Inflation in the US has been surprisingly soft during 2017, with the core CPI up only 1.7% over the year to November. In our view, inflation has been constrained by several transitory factors, including sharp drops in wireless and pharmaceutical prices, and we expect core CPI inflation to gradually grind higher to 2.1% by the end of next year. The US Federal Reserve (Fed) lifted the federal funds rate three times to 1.25-1.50% in December and we expect the Fed will continue to lift rates gradually given the robust growth outlook and firming inflation pressures, with 3 hikes expected in 2018 and a further 2 hikes in 2019.

The euro area economy has rebounded strongly in 2017, buoyed by improving external conditions, the lagged impact of lower oil prices, ongoing monetary policy support and diminishing fiscal headwinds. The improvement has been broad-based across the region, with all countries experiencing a pick-up in growth over 2017. The euro area outlook remains robust, although momentum is likely to ease somewhat from the strong performance in 2017. We expect euro area real GDP growth will average around 2.0% in 2018, down from a 2.4% pace in 2017 as higher commodity prices and the recent appreciation in the euro slow growth marginally next year. With the recovery progressing well and inflation gradually edging higher, the European Central Bank is expected to taper its asset purchase program over the December quarter 2018, before starting to lift rates in mid-2019.

In contrast to its ex-EU partners in Europe, the UK economy remains under pressure given ongoing uncertainty around post-BREXIT arrangements. Real GDP growth in the UK has fallen from 1.8% in 2016 to 1.5% over the past year. We expect ongoing BREXIT-related uncertainty will weigh on business investment in the UK and GDP growth is expected to continue to languish at a below-trend pace of 1.7% in 2018.

Inflation in the UK has risen sharply in 2017, with the year-ended rate reaching 3.1% in November, due to the lagged impact of the post-BREXIT exchange rate devaluation. Concerns over elevated inflation led the Bank of England (BOE) to hike Bank Rate by 25 bps to 0.50% in November. As the exchange rate pass-through slowly diminishes, we expect inflation to gradually moderate, averaging 2.5% over 2018. Nonetheless, to keep inflation expectations anchored, we expect the BOE will be forced to raise rates a further 25bps to 0.75% by late 2018.

In Asia, growth has picked-up in 2017, benefitting from a sharp turnaround in global trade. Signs of improvement have been evident in Japan, South Korea, Taiwan, Hong Kong, Singapore and Thailand over recent quarters. Growth in China has remained solid at 6.8% over the year to the September quarter 2017. In contrast, growth in India has eased over the past year, weighed down by disruptions from the demonetisation program in late 2016 and GST introduction in July 2017. Real GDP growth is Asia is expected to remain solid in 2018. However, momentum is expected to slow slightly with growth in the region forecast to ease from 5.6% to 5.5%. The moderation in Asia is expected to be led by a modest cooling of the Chinese economy, where growth is forecast to ease to around a 6.4% pace in 2018 due largely to a slowdown in real estate investment and further restructuring in heavy industries faced with excess capacity.


Table 1: Financial market movements, 14 - 21 December 2017

Equity index



10-yr government bond



Foreign exchange



S&P 500





13.3 bps

US Dollar Index (DXY)



Nikkei 225





1.1 bps




FTSE 100





8.8 bps









10.1 bps




S&P/ASX 200





11.0 bps





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