Since the first quarter of 2017, the US economy has accelerated to a rate even slightly above what we believe to be the “new normal.” The newly gained momentum has carried into the New Year. Expect about 2.7% for 2018 as a whole, which compares favorably to 2.4% in 2017 and 1.5% in 2016
Strong Fundamentals support this outlook. Improving household finances and corresponding consumer confidence will lead the way:
1. Incremental improvement in the labor market, especially in quality of jobs, will continue.
2. Increasing prices for housing and financial assets will add to the ongoing “wealth effect” and buoy consumer confidence.
3. Inflation will remain muted, maintaining consumer buying power.
We expect more of the same under the new Fed leadership. Chair Jerome Powell should steer the Fed to three more 25 basis points hikes in 2018, given the economic outlook. Those would likely come in March, September, and December.
In Europe, 2017 GDP growth was 2.4%, the best since 2007. We expect economic growth to flatten and remain about the same for the coming year. There is a healthy balance of factors that should support sustained activity: and improving employment picture, a competitive euro, and continued European Central Bank (ECB) support. Possible trouble spots include a “hard Brexit,” political uncertainty and non-performing loan situations, notably in Italy and Spain.
Japan enjoyed above-trend economic growth of approximately 1.8% in 2017 and the Japanese equity markets rewarded investors for the improvement. Much like Europe, we expect those gains to level off. Slowing China, a key trade partner, and removal of monetary stimulus will serve to contain economic activity.
In China, during the past year the government provided stimulus to help mute the effects of deleveraging. Many of the problems still haunt the world’s second largest economy: a housing glut, huge debt overhang, and excess industrial capacity. China’s intermediate-term goal is to extract itself from these troubles, in part, by transitioning its economy toward more service industries.
President Xi Jinping will do all he can to avoid a financial crisis, and the deleveraging policy will undoubtedly slow Chinese growth. China’s GDP is expected to drop from 6.8% in 2017 to 6.5% in 2018.