Global Economy: More Growth, Dearer Money
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Global Economy: More Growth, Dearer Money

Global economic growth should remain strong in 2018, as both advanced and emerging economies enjoy a synchronized upturn.

According to Credit Suisse the global economy is likely to see sustained solid growth even as monetary policy becomes less accommodative. Global GDP growth should accelerate slightly to a pace of 3.8 percent, while global inflation is forecast to reach a benign 2.7 percent. In addition, corporate capital expenditure, having been restrained in recent years, will become a key growth driver going forward.

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Capex and Fiscal Policy as Additional Growth Drivers

Employment and consumption have been the key growth drivers in recent years, while low interest rates fostered a boom in real estate investment in a number of countries. Corporate capital expenditure was fairly subdued, however. With the overall growth outlook firming, business sentiment rising, labor markets tightening but profitability high, we expect corporate capex to become a key growth driver going forward.

Investment cycle is recovering

Consumption and investment volumes for 19 large industrial economies, GDP-weighted and indexed (2010 = 100)

Source: AMECO, Datastream, Credit Suisse
Last data point: 2016 (2017 estimated)

Tax cuts and some fiscal easing in the USA and Germany, in particular, should also fuel growth. Global trade is likely to accelerate, outweighing protectionist tendencies.

Global trade in recovery

Trade volume indexes, 3-month moving average (Jan 2000 = 100)

Source: CPB World Trade Monitor, Credit Suisse
Last data point: July 2017

Continued "Lowflation" as Base Case, but Some Upside Risks

Structural forces that favor disinflation, such as the "gig" economy, i.e. a labor market in which workers flexibly offer temporary services, remain in place. In specific sectors such as retail, the internet is increasing price transparency and pressuring margins. Moreover, inflation expectations are generally anchored at low levels.

Finally, a number of global industries are still suffering from excess production capacity. Nevertheless, as labor markets tighten in some countries, including the USA, Germany and Japan, stronger wage growth could lead to somewhat faster price rises. An upside surprise in commodity prices is an added risk factor.

Central Banks to Reduce Liquidity

The US Federal Reserve (Fed) embarked on a program of balance sheet reduction in October 2017. The European Central Bank (ECB) and others are set to wind down asset purchases in 2018. In late 2018, the cumulated balance sheets of the major central banks will thus begin to shrink. In the course of 2018, a number of major central banks are also likely to join the Fed in raising interest rates. In emerging markets, the phase of policy easing is nearing its end. Overall, global monetary policy will thus clearly turn less accommodative.