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Macro Economic Review

Macroeconomic Review

    World GDP growth is on its way to accelerating towards 3.6% in 2017, slightly above early estimates. This is a consequence of growth rates in general beating expectations in 3Q17. The rebound in quarterly growth rates has been observed not only in the developed economies but encouragingly also in the emerging ones, which had been decelerating since 2013, relatively underperforming the evolution observed for developed economies.

    Contributing decisively to this, and surprisingly, growth has been quite stable last year in China, although some softening has been observed in 2H17. In addition, some other big emerging economies that were in recession in 2016 have rebounded strongly as it is the case of Brazil and Russia. Many other smaller emerging economies have outperformed expectations, particularly in Asia or Emerging Europe (where a few economies are on the way to achieve growth rates even above 6% in 2017, including Turkey - most of these smaller economies are expected to lose some steam next year from this very strong pace).

    More importantly, however, as 2017 is in the rearview mirror now, world growth is expected to continue to accelerate in 2018 towards 3.7% according to consensus estimates. Although it seems a modest acceleration, remarkably it will be the fastest growth pace since 2011 when the world economy expanded at a 4.3% rate. All in all, it seems that the global cycle would extend easily into 2018. Furthermore, risks to global growth in 2018 are tilted to the upside.

    It seems no coincidence at all that some of the main confidence indicators in some of the major global economies have been in the last several months at their highest levels since at least 2011. This has been particularly the case in the US and the Eurozone. It is probably in part because of this that growth has been revised upwards in the two main developed areas, not only for 2017 in repeated occasions particularly in the Eurozone, but also more clearly for 2018 in the last few months. Fundamentals have not improved to such extent to suggest that recent growth rates in the US and the Eurozone are sustainable over the medium term although in the US and very importantly, the capex outlook has improved over the short run. Yet the very strong confidence signals in both areas and the strength of the global cycle would underpin some continuation over the next few quarters. In this regard, the recovery of growth in emerging economies is a boom for Eurozone growth while the tax cuts in the US constitute a tailwind for growth.

    Importantly, in spite of the acceleration in global growth, inflation is expected to continue to remain not a concern for the coming quarters. Inflation expectations at a global level have been trending down since 2016. In the US, we expect inflation to recover rates around to 2% when distortions in early 2017 drop from the calculation from April 2018 onwards this base effects will fade. However, we don’t expect inflation to rise too much above 2% as its relationship with past GDP growth suggests. There are also risks to the downside over the short term due to the recent slowdown in unit labour costs. There are some risks to the upside - more relevant for 2H18 or early 2019 - potentially coming from the effect of tax cuts as the US economy seems to be operating at full employment.

    In the Eurozone, on the other hand, inflation is even less of a concern. If anything, underlying inflation still needs to confirm its upward trend after spending the last few years trapped in a range between 0.7% and 0.9%. Precisely, it is because of this, the failed attempt to accelerate over 1%, which we think the ECB continues to keep its dovish tone until now.

    Finally, we find the global economy and the major developed economies to be far away from a cyclical point consistent with past recessions. This translates into a world output gap that is just closed (around 0%), very far away from the very positive levels reached in 2007. Still, it can be argued that a recession ensued in 2000 or that global growth suffered a slowdown in other periods like 2010 without an elevated output gap. In our view, this occurred because at least some of the main areas (developed or emerging) were operating clearly over potential defined by a quite positive output gap. It is neither the case for the developed nor the emerging output gap at the current stage. Some caveats still remain as some measures of the output gap look more stretched in some developed economies. This is the case in the US or the UK, where the unemployment rate gap (another measure of the spare capacity) looks consistent with these economies operating more clearly over potential.