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2018 Global Economic Outlook: A Post-Crisis New Cycle Summary

Core Content

The 2018 Global Economic Outlook report outlines a period of global economic recovery following the financial crisis. It highlights the convergence of investment and consumption as the main drivers of growth, along with rising inflation and the impact of monetary policy adjustments. The report also emphasizes the role of emerging markets (EM) in driving global trade and the implications of the interest rate gap between major economies.

Main Views

1. Global Economic Growth and Inflation

• Growth: Global GDP growth is expected to rise from 3.1% in 2017 to 3.3% in 2018, driven by both investment and consumption.
• Inflation: CPI inflation is projected to increase to 2.5% in 2018 from 2.2% in 2017, with EM inflation outpacing DM inflation.
• Drivers: The recovery is attributed to strong demand, especially in EM, and a shift from investment-led to consumption and investment dual-led growth.

2. Investment and Consumption Trends

• Investment: Investment was the primary driver in 2017, with significant rebounds in the US, Germany, and Japan.
• Consumption: Consumption is expected to improve in developed markets (DM) due to a stronger labor market and higher wages, while EM consumption remains robust due to urbanization and structural upgrades.
• Growth Shift: The economic driving forces are shifting from investment alone to a combination of investment and consumption, which is expected to sustain growth in 2018.

3. Monetary Policy and Interest Rates

• Fed Policy: The Federal Reserve is expected to raise interest rates 2-4 times in 2018, with the 10-year Treasury yield potentially peaking at 3.1%.
• ECB Policy: The ECB is less likely to tighten monetary policy due to low inflation and below-potential output in the EU, leading to a widening interest rate gap between the US and EU.
• China Policy: The PBoC may also raise interest rates due to inflation and capital outflow concerns, but the gap with the US is expected to narrow to 1.3pp from 1.5pp in 2017, raising RMB depreciation risks.

4. Global Trade and Commodity Prices

• Trade Recovery: Global trade volume grew at 4-5% in 2017, with EM contributing more to export and import growth than DM.
• Commodity Prices: Commodity prices, especially energy prices, are expected to rise in 2018, with oil prices outperforming metal prices due to stronger global demand.
• Metal Prices: China's import demand is a key factor in metal price increases, but slower growth in 2018 may temper this trend.

Key Information

Economic Indicators Forecast for 2018

Structural Factors and Risks

• Inflation Dynamics: Inflation is expected to rise due to strong demand and monetary tightening, but it is still below historical averages.
• Trade Policy: Trade protectionism is waning, and globalization is regaining popularity, which supports global trade growth.
• Main Risks: A rapid exit from quantitative easing (QE) could lead to asset bubbles bursting and currency depreciation in EM, especially if inflation exceeds market expectations.

Exchange Rate and Interest Rate Impacts

• US Dollar: The US dollar is expected to bottom out in 2018 due to the widening interest rate gap with the EU, with a potential peak at 100.
• RMB Depreciation: The narrowing interest rate gap between China and the US may lead to RMB depreciation, potentially to 6.7 against the USD, which could boost exports.

Conclusion

The global economy is entering a new cycle of growth driven by both investment and consumption, with inflation rising in tandem. Central banks are cautiously normalizing monetary policy, leading to a widening interest rate gap between the US and EU, and a narrowing gap between China and the US. These trends are expected to impact global trade, commodity prices, and exchange rates, with the US dollar likely to strengthen and the RMB facing depreciation pressure. The report emphasizes that while the economic outlook is positive, risks such as a rapid exit from QE and asset bubble concerns remain.