Economic Outlook: December

Global economy:The global economy is on a recovery track. However, expectations should not be set too high. This is not a boom. Global GDP growth is being boosted by higher growth in the USA and in Latin America. Brazil is gradually digging itself out of its crisis. China, meanwhile, will likely experience a slight weakening of momentum. In the developed world, there are now justifiable hopes of a faster rate of expansion in the US economy. The eurozone looks set to repeat last year’s growth rate

USA: Important leading indicators for the USA point to higher growth of personal consumption and investment in 2018. If that happens, GDP could rise by 2.6%. There is uncertainty on the inflation side, however. Inflation has recently been lagging expectations. Given the record-low unemployment rate, one could now expect to see a pick-up in wage growth and faster inflation. But it is too early to be confident that this will happen. At the latest reading core inflation was still below the Fed’s 2% target.

Eurozone: Strong GDP growth in the eurozone was one of last year‘s big surprises. But most analysts are being ultra-cautious about 2018 and expect growth to weaken. In our view, this ignores the impact of self-reinforcing mechanisms. If capital spending takes off, companies will be ordering more goods from each other. That produces an upward spiral. We are therefore optimistic that expansion can at least equal last year‘s rate of 2.2%.

Germany: Germany’s economic growth will broaden in 2018. In previous years expansion had been driven mainly by personal consumption, but now capital spending and exports are gaining momentum. Companies are looking to the future with renewed optimism and increasing their investment activity again. Interest rates are low, and the eurozone now looks in better shape economically. Many business leaders are therefore putting money into upgrading plant and equipment. This benefits other companies, whose improved order books mean more jobs.

Switzerland: Switzerland’s economic performance in 2017 was disappointing. Positive leading indicators at the start of the year had pointed to a faster rate of expansion. We now expect the gap between upbeat leading indicators and actual economic performance to close, at least to some extent. We forecast a growth rate of 1.5% in 2018.

Emerging markets: The economic picture in the emerging markets is mixed, though more countries here are now achieving positive growth than in previous years. While China grew powerfully in 2017 (according to the latest readings), the rate of expansion in India sagged somewhat. In Latin America, recessions in Brazil and Argentina appear to have been overcome, and these countries are now embarking on a recovery phase. The stabilisation of crude oil prices has contributed to the recovery now being experienced in many commodity-exporting countries, notably Russia. China’s GDP grew vigorously in the first three quarters of 2017. The rate of expansion was of the same order as in the previous year. The Chinese government has so far succeeded in ensuring that the shift towards slower growth proceeds in a gradual fashion, with the contribution of consumer spending rising relative to capital spending. Thus the transformation of China to a more consumption-oriented economy is happening smoothly.