While the threat of a trade war lurks darkly in the corner, the good news is that, regardless, the global economy is still pushing strongly ahead.
Global economic conditions remained strong in the first quarter of 2018 and this momentum is expected to continue through the year. In our April Quarterly Economic Outlook, KPMG Economics has revised up its forecast of global growth, with real GDP now expected to be 3.8 percent for both 2018 and 2019.
Closer to home, we forecast real GDP for the Australian economy to grow at around 2.9 percent for FY2018 and 2.6 percent for FY2019.
Internationally, the important change from recent years is that growth has been widespread – and this pattern is forecast to be maintained, at least in the short term.
Major advanced economies, led by Japan, South Korea and Germany recorded stronger-than-expected growth in the last quarter. And China, India and South Africa have also registered strong growth benefiting from increased world trade and a pick-up in investment.
Growth rates for the Euro Area (EA) and the European Union (EU) beat expectations in 2017 as the transition from economic recovery to expansion continued. The EU expanded by 2.5 percent, its strongest performance since the Global Financial Crisis (GFC) in 2007, while the EA is estimated to have grown by 2.4 percent.
Looking ahead, despite the possible headwinds from the Brexit negotiations, economic growth in Europe is forecast to remain strong in 2018.
Spare capacity in labour markets is diminishing and appears to be at full capacity in a number of advanced economies. Forward-looking indicators also suggest a continuation of relatively healthy employment growth over the next few quarters – although this is expected to slow in the medium-term as slack in the labour market tightens.
While economic growth has been picking up and labour markets strengthening, inflation has remained muted. Whether this remains the case is engaging a lot of debate within the business community. At what point will higher economic growth and the absorption of the slack in the labour market result in faster earnings growth, and eventually higher inflationary pressures?
If inflation does reignite, central banks are likely to respond with more aggressive monetary policy to combat it and prevent the economy from overheating – an upside surprise in inflation is a key risk for 2018. The new chair of the Federal Reserve, Jerome Powell, is expected to oversee a gradual tightening of monetary conditions in the US.
At home, the economy continues to chug along rather than motor. There was a slow end to 2017 – the Australian economy grew by 0.4 percent q/q (seasonally-adjusted) in the December quarter of 2017 following an upwards revised 0.7 percent q/q growth in Q3 2017. On an annualised basis, the Australian economy grew at 2.4 percent in 2017 – slower than the upwardly revised 2.9 percent y/y in Q3 2017. Household consumption expenditure remained strong however, contributing 0.6 percentage points to GDP growth.
And the labour market is more encouraging – employment increased strongly by 17,500 (seasonally-adjusted) people from January to February 2018 while labour force participation rate also increased by 0.1 percentage points to 65.7 percent in the month of February 2018 – the highest since 2011.
This is a positive sign for the labour market signalling the return of discouraged workers and first-time participants into the labour force. Wage growth, once again, remains relatively subdued.
Our forecasts for growth for Australia over the next two years are around 1 percent lower than globally. We may need a continuing strong international economy to pull us along.
The big risks to the global outlook include the possibility of financial vulnerabilities, increased protectionism, and rising geopolitical tensions. In our recent report, the Re-emergence of Protectionism we have covered in detail the dramatic potential for economic decline should the imposition of tariffs by the US on steel and aluminium imports – and the potential application of tariffs on goods from China – lead to general trade retaliation.
There is however an ‘upside’ possibility – global economic growth could exceed expectations in the short-term if fiscal stimulus has more of an impact than anticipated and the high level of sentiment carries over to increased investment and trade. Let us hope very firmly this scenario happens rather than a trade war.