By Jim Power
The Global Economy in 2018
The international growth momentum is quite vibrant as we ended 2017 and the outlook for the global economy in 2018 looks quite promising. The US economy should continue to expand at a rapid pace, the outlook for the emerging economies looks positive, and as 2017 ended, growth in the Euro Zone outpaced that in the UK and this is likely to remain a global theme during 2018.
The key uncertainties over the coming year would appear to be:
- Brexit – the negotiations have not gone well and the outlook remains as uncertain as ever. Any outcome is possible at this stage, but the odds are still leaning towards a ‘hard Brexit’, with WTO tariff rates applying after March 2019. However, a transition period cannot be ruled out, although it is difficult to see the EU giving the UK any concessions on the 4 key pillars of the EU, namely freedom of movement of goods, services, capital and people. The Prime Minister’s political position is precariously poor, so she is negotiating from a position of extreme weakness, unlike the EU side. Intense uncertainty will prevail for the foreseeable future;
- If President Trump seeks to push ahead with his protectionist agenda, global growth would ultimately be damaged;
- Equity markets have come a very long way since the first quarter of 2009;
- While the Chinese economy has stabilised financial imbalances remain a feature of that economy and could re-emerge as an issue over the next couple of years;
- Geo-political uncertainty is still a key feature of the landscape, ranging from ISIS led global terrorism to North Korea to migration-induced tensions in the EU;
- The growth of nationalism in countries such as Catalonia, Hungary, Poland and Austria; and
- An election must be held in Italy before the end of May 2018.
Notwithstanding these obvious risks, the world economy seems to be in the sweetest growth spot for a decade.
The Global Economy in 2017
The key global economic theme in 2017 has been that of economic recovery. The US economy expanded at a steady pace during the year, with most economic indicators performing quite strongly. Consumer confidence reached the highest level in 17 years towards the end of the year. China and the emerging economies stabilised and showed some improvement. However, without doubt, the most positive economic surprise during the year was the Euro Zone. It experienced a strong and geographically broad-based and increasingly sustainable economic recovery. The only real source of concern was the UK economy. It had held up well in the aftermath of the Brexit referendum in 2016 as the weakness of sterling gave a significant boost to the export sector in general, and the manufacturing sector in particular. However, as 2017 progressed, consumer spending was undermined by higher import prices due to sterling weakness, and a growing level of business uncertainty. No surprises there as brexit is the most unpredictable and most significant source of uncertainty to hit the UK economy in generations.
On the interest rate front, the US Federal Reserve increased rates twice during 2017 (another increase is likely on December 13th) by a combined 0.5%. The Bank of England increased rates by 0.25% in November, taking its official rate up to 0.5%, due to rising inflation. The ECB did nothing with official rates during 2017.
The ECB remains very relaxed about interest rates, despite the relatively strong growth recovery. Inflation in the EU remains well behaved at 1.4% and although the labour market is improving, the EU unemployment rate is still at a high 8.9%. Later in 2018, the ECB will cease its bond buying programme under Quantitative Easing (QE), but it is likely to be 2019 before official rates start to move back towards normality. However, if the current strong growth momentum is maintained, the ECB could start to become less relaxed as 2018 progresses. The US Federal Reserve is likely to increase rates further, but the Bank of England is not likely to takes rates much higher for the moment.
For equity market investors, 2017 has been another reasonably good year. In the year to December 6th, the Dow Jones Industrial Average experienced capital gains of 22.4%; the S&P 500 delivered gains of 17.5%; the German Dax delivered gains of 12.3%; the NIKKEI delivered gains of 16%; the ISEQ delivered gains of 6.6%. Not surprisingly, given all of the intense uncertainty around Brexit, the FTSE 100 delivered gains of just 2.6%. For equity investors the importance of currency as a consideration was highlighted in the US and UK in particular. During the year, the dollar lost over 12% against the euro, and sterling lost 3.4% of its value against the euro. When these currency adjustments are accounted for, the Dow Jones gained just 8.9% in euro terms and the FTSE 100 lost 1.2%.
Equity markets have come a very long way since the first quarter of 2009; While markets look modestly overvalued it is not obvious what would cause a significant correction just yet. With official interest rates and bond yields remaining very low and with QE still leading to lots of liquidity, markets can certainly go higher from here, but the reversal of QE and monetary tightening could impact at some stage. A year of more modest gains looks likely, but if Central Banks adopted a more aggressive approach to interest rate increases and reversal of QE, the markets would be vulnerable to a significant correction. Such an approach looks unlikely.
The Irish Economy
2017 turned out to be another year of solid growth for the Irish economy, with almost all economic indicators evolving in a very positive fashion. Consumer spending is getting gradually better; consumer confidence is quite high; the unemployment rate has fallen to 6.1% of the labour force and labour shortages are starting to become an issue; exports are doing well; and the public finances are continuing to improve.
Despite the recovery, the challenges facing Ireland are very clear. The main ones are a chronic lack of housing, under-funded and inefficient public services, managing the balance between public expenditure and taxation, growing wage and other business cost pressures, and of course Brexit.
Housing demand is being driven higher by solid fundamentals such as population growth, employment creation, an improvement in credit availability, and a basic improvement in confidence about Ireland’s future. On the supply side, we are simply not building enough houses.
Not surprisingly, the debate has started again about the bubble-like properties of the market. The argument about whether it is a bubble or not, is not really the point. The crunch for any market comes when it is hit by a shock, such as the sub-prime crisis back in 2008. If rising house prices have pushed debt levels higher, which is now happening, then the whole market and the economy becomes very vulnerable as we found out a decade ago. We need to increase housing supply as a matter of urgency. That is the only real solution. House prices look set to rise by up to 15% in 2018.
THIS ARTICLE IS BASED ON DATA AVAILABLE UP TO 6th DECEMBER 2017