A Rosy Global Economic Outlook for 2018

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  • 03 mins 42 secs
A synchronized global recovery? Yes, says economist Darrell Spence, who details the international markets that have continued to follow the U.S.’s lead.

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American Funds

American Funds Video Transcript: "A Rosy Global Economic Outlook for 2018"


Will McKenna: Darrell, six months ago we did this at midyear, and you were talking about a global synchronized recovery at that time. Where are we now, and what's your outlook as we head into 2018?

Darrell Spence: Yeah, if anything, I think the recovery has become more synchronized over the past six months. As one example, if you look at all of the different countries that report purchasing managers' indices on a monthly basis - and there's over 30 of them - over 95% of them show that their economies are in expansion mode. And to Rob's comment earlier, we haven't seen synchronization at this level since 2005, 2006, really at the peak of the last cycle. So recovery is broad, and you're seeing it even in places like Japan, where growth and inflation have been notoriously low for a long, long period of time. But growth in Japan has been above potential. Inflation, we think, may hit 1% this year, which doesn't sound like much but for Japan is a pretty heroic level of inflation.

As you look across Europe, growth there has also been well above expectations, well above potential. It has certainly benefited from the recovery that's been going on in the U.S. and in China; a weak euro has certainly helped. But what we're seeing now is an investment cycle getting underway within Europe. That should make their recovery more self-sustaining; lead to better job and income growth; and again, reduce their reliance on occurrences in the rest of the world and allow them to have a more self-sustaining recovery.

Will McKenna: So capex and things like that?

Darrell Spence: Absolutely. Capex, which leads to domestic demand, better employment growth; wages are picking up slightly - typical cyclical acceleration-type stuff. China may be a little bit the other direction. They're coming off a pretty healthy growth rate as it is. We see some fiscal and monetary policies being implemented to try to tap the brakes on that economy a little bit. But there are some offsets in the form of very positive consumer fundamentals, and again, a very positive external demand, which is very important for China's growth. So a bit of a slowdown in 2018, but nothing approaching what we saw in 2015-16, when there was a lot of concern about a hard landing. This is kind of the story of China: Things get too fast, they tap the brakes; they get too slow, they hit the accelerator. And that's what we think we're seeing - nothing more, nothing less right now.

And then, of course, there's the U.S. It's been a good economy for a while now - probably the furthest along in terms of economic recoveries - but we still think has a ways to go. Growth likely to remain above potential; unemployment rate likely to continue to drop. Inflation - we think this is probably where you're likely to see it first. In fact, some of the resource utilization measures that we look at suggest inflation could hit, if not exceed, the Fed's unofficial 2% target by the end of 2018. So that is something that we're watching pretty closely. And we think the central bank will continue to tighten gradually. I think two to three rate increases in 2018 is probably a reasonable assumption unless, again, growth or inflation really do something different than what is our base forecast.

So again, when you add all this together, you're looking around the world, you've got good growth. You've got moderately rising inflation, but probably not rising fast enough to be disruptive to that growth. You have central banks that will be responding, but responding, again, very gradually. This is a pretty rosy scenario. It's a great one for profit outlook, or a great one for profits, too. So we tend to think risk assets will be pretty well-supported in 2018.


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