“Canada, the US and UK are close to full employment, and wages are accelerating. Only in the UK, where there has been a currency-driven uptick in inflation, has this failed to translate into real wage gains. “(RBC Economic and Financial Market Outlook, March 2018).
According to recent IMF estimates, the global economy advanced at a 3.7% real rate of growth in 2017 and is expected to expand by a further 3.9% in 2018 and then in 2019.
In fact, according to the IMF, some 120 economies, accounting for about three quarters of the world economy, experienced a step up in GDP growth in 2017. In other words, we are currently experiencing the broadest synchronized global economic expansion since 2010.
Indeed, in virtually all of the advanced economies, unemployment rates are either falling or are already at relatively low levels.
Nonetheless, the consensus supporting this relatively robust global outlook requires that there are no major external shocks to the advanced economies. The “no major shock assumption” may be hard to deliver.
Lets briefly focus on the four largest economies — the U.S., China, Japan, and the Euro Zone.
Huge tax cuts and expenditure increases were imposed on a nearly fully employed American economy, and as a result, will boost economic growth in 2018 and 2019.
The American economy’s real GDP is expected to expand about 2.8% in 2018 and 2.4% in 2019. Why doesn’t the U.S. economy grow even faster considering that the intention behind these policies was to accelerate growth? The answer is that a nearly fully employed economy’s growth is constrained by the rate of growth of productivity (less than 1% annually) and the growth of the labour force (also less than 1% and projected to slow further). In other words, the short-term boost to the U.S. economy will be mostly driven by the investment response to the corporate income tax cuts.
China was able to slow its economic deceleration last year and its economy grew at a 6.6% annual rate in the fourth quarter. As long as the global economy continues to expand and assuming that there is no significant trade war on the horizon, China’s economy should be able to continue to grow in the 5-6% annual range in 2018 and 2019.