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What to Expect from the Global Economy in 2018 or How to Make Astrologers Look Good

Posted on 5th March 2018 by Martha Greengrass

Economist Dharshini David, author of The Almighty Dollar, a new book that gets to the heart of how our globalised world works, predicts 10 things in store for the world economy in 2018.

Estate agents, bankers, even journalists, famously get a bad rap – now it’s the turn of economists. The government’s Brexit Minister dismissed their predictions as "always wrong”. It must have been painful for “dismal scientists” to hear  (and Whitehall is the biggest employer of economists) but disdain is nothing new. A newspaper survey once found refuse collectors made for more accurate forecasters. Even one of the most renowned of the profession claimed,  "Economic forecasting exists to make astrologers look respectable". 

It’s a little harsh. On the whole, as they pore over the evidence and spreadsheets, economists don’t do a bad job. It’s just that like markets, they tend to get more attention when they’re crashing and burning than trundling along nicely. And like everyone, they can be wrong footed by seismic events - be it literally earthquakes, or the election of a former reality show host to the highest office in the US. 

Major tremors aside, what might be in store for 2018? Here are 10 things to look out for:

1.  Things are only getting better:  the global economy is growing at its fastest rate since 2011. Ten years on, the financial crisis feels a distant memory – although inequality, between and within nations, is throwing up questions about the workings of modern capitalism.

2.  America made great again? The proportion of Americans out of work is at a 17 year low, the nation’s income is rising at a robust pace. Will it last? President Trump’s tax cuts may give spending (particularly of the richest) a short-term boost, but higher interest rates and nerves about a trade war may start to cool things down.

3.  Stock markets suffer vertigo. Within days of President Trump boasting of “a stock market (that) is smashing one record after another”, Wall Street set another: the biggest fall in value of American shares, ever. After soaring 25% last year, the leading Dow Jones Index suffered vertigo. The fall is being a labelled a correction, a conscious re-coupling (to misquote Gwyneth Pathrow) with the still sturdy underlying fundamental picture of economic and profits growth. More wobbles may be ahead – not just in traditional shares but the likes of Bitcoin, the newly minted digital currencies, which have seen their values soar and subside. 

4.  The dollar not made great again. For all the trumpeting of “America First”, the White House is quite happy to see the value of its currency slip. This is no contradiction. A weaker dollar makes American exports cheaper on the world markets, helps American companies sell abroad. It also boosts the value of their overseas earnings. All this is helpful when erecting trade walls might otherwise hurt business.

5.  China indulges in navel gazing. After catering to the rest of the world’s hunger for cheap textiles and widgets for decades, China’s turning its attention inwards. The focus is now on boosting domestic, not export, spending. That adjustment means a slightly less fast growing economy than in recent years – which could impact the price of oil and other commodities. But China continues to look to spread its influence around the globe, by investing its hordes of cash in investment projects and companies elsewhere.

6.  India to take the crown for fastest growth? Much has been made of India’s miraculous IT industry. But it has far to go. The tech sector employs less than 1% of Indians.  By contrast, about half the population works in farming. Those workers are only a fraction as efficient as American farmers, hampered by poor infrastructure, low-tech processes and a lack of machinery. There’s great potential, but realising it depends on the government being able to follow through on plans to attract foreign money to boost its manufacturing and services sectors and implement a digital revolution. 

7.  Europe undergoes a renaissance:  Brexit campaigners claimed that by staying in the EU, the UK would be  “shackled to a corpse”. But in reality, the countries that use the Euro expanded at their fast rate in 2017 for a decade. That pace of expansion may be impeded in 2018 by a strong Euro (which makes European exports dearer) and political uncertainty in Germany and Italy. But it’s nothing for Brussels to panic about. 

8.  The UK: waving, certainly not drowning. The Chancellor crowed that the UK economy was doing better that anyone had expected in the post-referendum era. But we’re outpaced by Europe, and with uncertainty over Brexit making consumers nervous about spending, and deterring businesses from investing, things are likely to stay that way. The good news is that wages are likely to start rising faster than prices for the first time in years. 

9.  The shape of Brexit may remain unclear. The government has plenty on its agenda – from agreeing a transition period to then negotiating the overall shape of the future relationship on the EU. The hopes are to have a broad deal by October, so that it can then go past the European Council and the UK parliament. But there’ll be plenty of opposition from other EU nations and Theresa May’s own backbenchers on the way. It’s only after this deal is passed that the details of the deal will be hammered out. Another General Election or even a second referendum can not be ruled out 

10.  The end of cheap money? A whole generation of homeowners have never known mortgage rates above 5%  - and not just in the UK. But a decade on from the financial crisis, the era of ultra-ultra low interest rates in the US, Europe and UK is ending. The mantra from central banks is slow and gradual rates rises. A return to the levels seen pre-crisis is very unlikely: relief for borrowers, less so for savers.

But ultimately, don’t forget to expect the unexpected – 2018 may just be the year when refuse collectors shine again. 

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