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US - Growth picked up pace over the course of 2017 and we expect growth to be a little higher this year
Eurozone - Despite strong business surveys and consumer sentiment readings, GDP growth should slow a little this year
UK - After 10 years, GDP will now be almost 6 per cent lower than it would otherwise have been
Canada - Growth surprised to the upside in 2017. We expect the rate of growth to moderate to around 2 per cent
Japan - The economy remains in a good place. And while growth is expected to moderate slightly, it is still likely to remain robust
China - After a year that has seen Chinese growth defy predictions of a slowdown repeatedly, some signs of moderation are emerging
Strong underlying growth dynamics at the end of 2017 received a further boost with the passage of household and corporate tax cuts at the end of last year and a boost to government spending. Together those fiscal measures are likely to add between 0.5-1 per cent to growth this year and only marginally less in 2019. As such we have revised up our growth estimates this year and next, and remain above consensus. With stronger growth and a further tightening of the labour market, we expect core inflation to move back to the 2 per cent target by the middle of 2018 and to be above that in 2019. We expect the Federal Reserve will deliver four rate rises in each of 2018 and 2019.
Sentiment across the Eurozone has slipped slightly from recent peaks, but remains upbeat and argues for another year of above-trend growth in 2019. A small moderation in growth would be welcome, as there is much less spare capacity now remaining and trend growth is estimated at only a little above 1 per cent. With inflation still subdued and only expected to rise slowly back towards target, the ECB will withdraw extreme stimulus very gradually. Asset purchases should halt this year, while modest policy rate increases are more likely to come next year rather than this.
The UK outlook continues to be dominated by Brexit negotiations with risks still tilted to the downside. The modest pace of current growth (around 1.5 per cent annualised) is in line with the lower growth rate of supply-side potential that is now generally accepted. As a result, the Bank of England believes a modest tightening bias is appropriate. However, if inflation falls further in 2018, as we expect, that view could be reassessed, especially if growth were to weaken. Prospects are not calamitous, but with low rates, a weaker currency and a favourable global backdrop, the UK should be doing better.
Growth surprised on the upside in 2017 and labour market slack was absorbed more quickly than expected. Going forward, growth is expected to slow. High levels of debt in the economy and a stretched housing market mean that consumption and investment will contribute less to growth this year as the impact of higher interest rates and new mortgage guidelines take effect. NAFTA also presents a source of uncertainty and will weigh on the outlook. That said, growth remains above potential and wage pressures are clearly coming though. Risks remain on the more hawkish side, with an additional hike likely later in the year.
Strong upside growth surprises in 2017, fuelled by domestic demand, suggest significant momentum into 2018. With the global cycle strong, net exports are likely to contribute positively. Surveys and corporate profitability point to a strong investment outlook. Upside surprises to 1.8 per cent yoy growth are likely. Inflation should grind higher gradually, but will probably fall short of the 2 per cent target by 2019. With the yen rising against the US dollar recently, the stakes are high for the BoJ to tailor its message carefully to a market nervous about a shift in policy, which could have large implications for inflation expectations and in turn the central bank’s inflation target.
Now that President Xi Jinping has consolidated power, policymakers will re-focus on reforms. At the top of the agenda is financial stability which means deleveraging will continue and growth will slow. However, the 6.5 per cent target will likely be achieved at the start of the president’s ‘third term’. The lower fiscal deficit target (2.6 per cent vs. 3 per cent) looks achievable if they cut infrastructure spending. While a policy mistake is still the main risk for China, escalation of trade tensions between the US and China could also pose a threat to growth. Inflation remains benign which means the PBoC will maintain its neutral policy stance. We expect the currency will also remain stable.
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