Macro Summary Feb 2017
Global growth is expected to come in at 2.6% in 2016 as a result of a better than expected outturn for Q3 and continued momentum in Q4. The growth forecast for 2017 has been upgraded to 2.8%, led by a more optimistic view on the emerging markets, the UK (smaller Brexit effect than expected) and the US (boost from fiscal loosening). Inflation rises modestly due to higher oil prices. In 2018, global growth is expected to accelerate to 3% thanks to the full impact from fiscal loosening in the US, and falling inflation in Europe helping to boost demand.
The US Fed is expected to raise rates twice in 2017 taking fed funds to 1.25% by end year. With growth strengthening and inflation rising, the pace of tightening is expected to increase in 2018 with four rate hikes taking the policy rate to 2.25% by end year.
UK inflation is set to rise sharply due to the fall in the pound, which will reduce disposable income of households and encourage cuts in spending. Investment is already weak, and has started to impact employment. The BoE is expected to remain on hold, constrained by higher inflation. Growth remains below trend in 2018 causing unemployment to rise.
Eurozone growth is set to ease in 2017 as a temporary rise in inflation constrains household spending. Political uncertainty will also weigh on business investment, though we assume the establishment holds on to power. The outlook for 2018 is more promising as inflation falls back, and external performance is boosted by better growth elsewhere. The ECB should maintain low rates and QE beyond the end of 2017, but will come under pressure to tighten.
Japanese growth forecast at 1.4% in 2017 and inflation at 0.8% supported by looser fiscal policy and a weaker yen. No further rate cuts from the BoJ, but more QE is expected as the central bank targets a zero yield for the 10 year government bond.
Emerging economies benefit from modest advanced economy demand growth and firmer commodity prices, but tighter US monetary policy weighs on activity. Concerns over China’s growth to persist, further fiscal support and easing from the PBoC is expected. Risks • Risks skewed towards weaker growth on fears of secular stagnation, political risk in Europe and a US recession. Inflationary risks stem from more aggressive Trump policy on tax cuts and trade.
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