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The world economy in 2018: New changes and challenges ahead

posted onDecember 25, 2017
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Will 2018 be a great year for the world economy? The World Bank forecasts global economic growth to edge up to 3.1 percent in 2018 after a much stronger-than-expected 2017, as the recovery in investment, manufacturing, and trade continues. Growth in advanced economies is expected to moderate slightly to 2.2 percent in 2018, as central banks gradually remove their post-crisis accommodation and the upturn in investment growth stabilises. Growth in emerging market and developing economies as a whole is projected to strengthen to 4.5 percent in 2018, as activity in commodity exporters continues to recover amid firming prices. Predictions for the global economy  are positive, but four  experts also foresee a rise in debt, inflation and geopolitical tensions. Read their opinion about what lies ahead. 

Michael Spence
Michael Spence, Nobel laureate in economics, Professor of Economics at NYU’s Stern School of Business

Michael Spence

Nobel laureate in economics, Professor of Economics at NYU’s Stern School of Business and contributor at Project Syndicate since 2008, Spence in a post published last month argues that the world economy will confront serious challenges in the months and years ahead.

“And looming in the background is a mountain of debt that makes markets nervous and increases the system’s vulnerability to destabilizing shocks. Yet the baseline scenario in the short run seems to be one of continuity. Economic power and influence will continue to shift from west to east, without any sudden change in the pattern of job, income, political, and social polarization, primarily in the developed countries, and with no obvious convulsions on the horizon.” he writes.

"Nonetheless, there are reasons to be cautiously optimistic. For starters, there remains a broad consensus across the developed and emerging economies on the desirability of maintaining a relatively open global economy" he adds.

Keith Wade, Chief Economist at Schroders
Keith Wade, Chief Economist and Strategist at Schroders, London

Keith Wade

A Chief Economist and Strategist at Schroders, London in Outlook 2018: Global economy Wade forecasts that both advanced and emerging economies will enjoy stronger growth in 2018. In the developed world, his team has raised their US and eurozone projections from 2% to 2.5%, and from 2% to 2.3%, respectively. Japan is forecast at 1.8% (previously 1.5%) and in the emerging world Schroders raise their growth forecast to 4.9% (previously 4.8%). The latter reflects better growth expected in most of the BRIC economies (with the exception of India) and incorporates a slightly stronger figure for China in 2018 at 6.4%. The economist forecasts inflation at 2.3% in 2018 (up from 2.2%), an outcome reinforced by higher oil and commodity prices, and reflected in the pick-up in producer price inflation around the world in recent months.

"2018 will see a fading of the Goldilocks combination of better-than-expected growth and weaker-than-expected inflation.  Structural factors such as the effect of technology remain important, but cyclical forces suggest that inflation will begin to catch up with the strength of economic activity next year." Wade writes.

Probal Dasgupta Reshmi Khurana 
Probal Dasgupta and Reshmi Khurana, Senior Director and Managing Director, respectively, at Kroll Associates, Inc, South Asia

Probal Dasgupta Reshmi Khurana 

Senior Director and Managing Director, respectively, at Kroll Associates, Inc, South Asia in a blog post at Economic Times, discuss the key political events that have the power to reshape the world economy in 2018. They argue, that the relationship of the US with the rest of the world is changing, especially with China, Russia and West Asia while China will move to fill any leadership gaps left by the US in global politics. In their opinion, disagreements between the US and China are also expected to grow in relation to the US’s role, along with that of its allies — Japan and India — in the geopolitical affairs of the Indian Ocean region. 

North Korea will remain a potential flashpoint in 2018 and  any significant aggression by North Korea, and reactions by South Korea, China or the US, is likely to have a swift effect on global equity markets and commodity prices, Khurana and Dasgupta say.

Other political events likely to impact the world economy will be how Britain negotiates Brexit and a number of national elections held in Italy and six Latin American countries. According to Khurana and Dasgupta, Brexit negotiations will have an impact on local and foreign investment in Britain while also of concern for investors is the direction of reforms and the stability of democratic institutions in Brazil, Mexico and Colombia as there is a risk that the incumbents may be replaced by authoritarian, populist leaders.

In our opinion, although global economic activity continues to strengthen, lingering fragilities related to the global financial crisis remain. A key question is whether consumers and businesspeople will be able to shrug off the existing and upcoming geopolitical threats in the months ahead.