Born to Run
12 December 2017
There is a sense of a Goldilocks scenario as investors look forward to 2018. Growth momentum that built over the course of this year is expected to persist across most economies, providing a supportive backdrop for risk assets. Indeed, while growth remains below that seen before the financial crisis, its persistence and breadth suggests that the uptick may at last be becoming more self-sustaining. Despite this upbeat backdrop, we do not forecast any material acceleration in inflation in 2018, even in those economies most advanced in their cycles. This combination of solid growth and relatively subdued inflation dynamics provides scope for most central banks to stage a slow exit from accommodative policy settings. Finally, while political risks have certainly not evaporated, they look to be weighing more on longer-term growth prospects rather than presenting near-term risks to the cycle at present. Bringing these views together, there look to be few immediate signs that the cycle is set to be rudely interrupted in 2018.
This favourable economic and market outlook rests on a number of key assumptions. On growth, the forecast assumes that we are starting to enter a more virtuous stage of the cycle, with businesses more prepared to take the plunge on investment and households easing back on their precautionary savings. Whisper it quietly, but we may even be seeing signs of a tentative uptick in productivity. We also assume that there are no idiosyncratic growth shocks on the horizon with, for example, the current slowdown taking place in China not expected to lead to a hard landing. With regards inflation, the translation from declining slack across economies to domestic inflationary pressures is expected to remain weak. This, alongside sustained structural forces, is expected to weigh on price growth. Finally, our forecast assumes that the global economy is in good enough shape to withstand tightening monetary policy across a swathe of economies. Our financial stress indicator provides some comfort that markets have been able to absorb the tightening delivered in the US thus far without incident. We will monitor this closely for signs that a policy mistake is brewing, which could disrupt the current cycle. Absent this, the headline assumption is that the global economic cycle has further to run.