The Global Economy in 2018

The global economy in 2017 performed better than expected at the beginning of the past year. The economic expansion may continue in 2018. However, global growth continues to remain unstable. There are uncertainties above all due to stock markets and financial markets, monetary policy and geopolitical hotspots.

Early 2017: Uncertainty clouds economic prospects

Economic expectations in 2017 were gloomy at first. The year began under a cloud, with global gross domestic product (GDP) in 2016 expanding at the slowest rate in the new century apart from the crisis years of 2001/02 (popping of the dotcom bubble) and 2008/09 (bankruptcy of Lehman Brothers) (see Fig. 1).

At the beginning of 2017 there were a number of risks that had a negative impact on expectations for growth:

• The inauguration of the 45th U.S. President Donald Trump gave rise to the threat of numerous protectionist measures. They would have led to a significant decline in world trade and the international division of labor.
• The elections in the Netherlands and France led to fears that these countries might leave the eurozone or even the European Union (EU). After the outcome of the Italian referendum on December 4, 2016, it was also unclear whether Italy would remain in the eurozone.
• And then there were numerous geopolitical conflicts such as the Ukrainian-Russian conflict, the civil war in Syria, the political unrest in Turkey, North Africa and the Middle East, and the dispute between North and South Korea, which also contributed to slowing growth.

End of 2017: Growth stronger than expected

Fortunately, many of the concerns in the first few months of 2017 did not materialize:

• The elections in the Netherlands and France did not lead to a weakening of European cohesion.
• The protectionist course threatened by Donald Trump did not go beyond the status of an announcement in most areas. As a result, global trade rose again relative to 2016.
• There was no escalation in the major geopolitical crises.

As a result of these developments, global GDP rose in 2017 and will be higher than in 2016, according to the preliminary estimates by the International Monetary Fund (see Fig. 1).

2018: What can we expect?

The global economic recovery in 2017 is likely to continue in 2018, according to the information available at this time. Four reasons play a special role in this assessment:

1. The risk of the EU or eurozone breaking apart is relatively low at the moment.
2. Commodity prices have stabilized. This helps commodity-exporting countries such as Brazil and Russia.
3. In China, President Xi Jinping consolidated his power substantially in the autumn of 2017. The consequence is that: there is increasing confidence that the country will be able to handle its economic problems – above all, its high level of debt.
4. The southern European sovereign debt crisis has not been resolved, but even in the most affected country – Greece – the threat of a sovereign default seems to have been averted, at least in the short term.

2018: Where are the dangers?

At the same time, however, there are also some risks that may put pressure on the global economy again:

1. The decision by the United Kingdom in the summer of 2016 to leave the European Union – Brexit – will be completed at the end of March 2019. The economic consequences of this departure are likely to increase over the course of 2018.
2. So far the protectionism threatened by the U.S. administration has largely been only an announced policy. However, it is quite possible that Trump will implement his “America First” agenda in 2018. This could lead to a global trade war that would cause a collapse in production and employment worldwide.
3. The consequences of many years of loose monetary policy – the development of speculative bubbles in asset classes (stocks, securities, real estate) – increase the risk that these bubbles will burst. The result would be a collapse in production and employment, as was the case after the real estate bubble burst and Lehman Brothers went bankrupt.
4. This risk should be considered as the current monetary policy winds down. A rise in interest rates entails global economic risks: Higher interest rates mean lower investment and a decline in debt-financed consumer spending. Production and employment levels decline as a result. Another danger is posed by the expected increase in interest rates in the United States. If interest rates rise there, it will be more attractive for global investors to take their money from other countries and invest it in the United States instead. It will then become increasingly difficult for highly indebted countries and companies outside of the United States to refinance. This raises the risk of bankruptcy, especially for developing and emerging economies, which would destabilize the global financial system.
5. The geopolitical crises in 2017 have not disappeared. Above all, North Korea poses a risk to the stability of the global economy.

Summary

The global economy is starting 2018 overall with both decreasing and increasing risks to its development (see Fig. 2). When taken as a whole, the changes in risks remain balanced, in my opinion. Global GDP in 2018 should therefore grow at roughly the same rate as it did in 2017.