Global economic growth exceeded expectations in 2017, and we expect another strong year in 2018. The Citi Global Economic Surprise Index, which was well above zero for most of the second half of 2017, signaled that global economic data was exceeding expectations. Drivers of strong global performance in 2017 included steady growth in the United States, better-thanexpected economic data in Europe, continued positive performance from Japan, and stabilization in China following several years of deceleration.
We expect the global economy to expand at a rate of 3.7% in 2018, measured by gross domestic product (GDP). Monetary policy has been a major driver of growth in the developed world in recent years, but with global central banks starting to rein in stimulus measures, fiscal policy may become a bigger factor. We expect employment growth, and the continued consumption growth it should enable, to continue to be supportive for the global economy in 2018. Business spending, which has been lackluster during most of the expansion, may also make a comeback, potentially adding to growth.
Developed Market Strength May Continue
As communicated in our updated forecast to our Outlook 2018, we expect U.S. growth to come in between 2.75%– 3.0% GDP in 2018 (an increase from our previous target of 2.5% based on the potential impact of tax reform), as fiscal support, a pickup in business spending, and support for consumer spending from a strong labor market potentially combine to produce solid growth.
For international developed markets (excluding the United States) we continue to expect growth of approximately 1.8%, supported by rising global demand and the potential for further business friendly reforms. Most developed nations are earlier in the economic cycle than the United States, and monetary support in the form of low interest rates and quantitative easing (QE) is still a factor in Europe and Japan, which is clear from the continual increase in central bank balance sheet assets. We believe that global QE may continue to fade in 2018, but market expectations for rate hikes from the European Central Bank (ECB) or Bank of Japan (BOJ) in 2018 are low.
The ECB is scheduled to end its current bond purchases of 30 billion euros per month in September 2018, though it has left the door open to extend purchases (potentially at a reduced level) if economic conditions warrant. We expect the recent pickup in growth to continue in the Eurozone, but low inflation, along with factors such as a surge in nationalism in Europe and ongoing Brexit negotiations, may mean monetary support is removed more slowly than would otherwise be expected.
Japan has also experienced steady growth recently, with the country experiencing seven straight quarters of positive GDP growth. The BOJ made a change to slightly slow purchases of longterm bonds in their QE program last week, stoking rumors that a meaningful reduction in overall purchases may be on the horizon. However, given the small magnitude of the change and the fact that Japan’s inflation readings are still well below its 2.0% target, we believe that this move was more of an operational adjustment and do not anticipate any major moves from the BOJ in the near term, especially before BOJ President Kuroda’s term expires in April (we expect he will be reappointed).