It’s been nine years since the world was brought to the brink by the financial crisis. But the global economy is heading into its strongest period since 2011.
Amid an increasingly upbeat view on how the global economy will fare in 2018, Wall Street economists are telling investors to brace for the biggest tightening of monetary policy in more than a decade. Citigroup and JPMorgan Chase & Co predict average interest rates across advanced economies will climb to at least 1% next year in what would be the largest increase since 2006.
As the quantitative easing marks its 10th anniversary in the US next year, net asset purchases by the main central banks will fall to a monthly $18bn at the end of 2018, from $126bn in September, and turn negative during the first half of 2019, according to a Bloomberg report.
There are expectations that the world economy will expand around 4% next year. And the triggers include falling unemployment, stronger trade and business spending, as well as a likely tax cut in the US. The International Monetary Fund predicts consumer prices in advanced economies will climb 1.7% next year, the most since 2012, although it still remains below the 2% most central banks view as price stability.
Mohamed A El-Erian, Bloomberg columnist and economic adviser at Allianz, the parent company of Pimco, picks out four positive developments on global economy: The synchronised recovery; policy progress; less structural economic uncertainty and continued orderly market acceptance of higher policy rates. Put together, these factors reinforce the prospects for better growth next year.
When central banks started cutting interest rates to near zero after the 2008 stock market crash, they saw it as an emergency measure and thought things would gradually get back to normal. Nine years later, rates are still super-low and unlikely to come all the way back. But many economies are still struggling to heal.
For sure, this is a policy guidance week. The Norges Bank, Federal Reserve, Bank of England, European Central Bank and Swiss National Bank are set to announce their final policy decisions of 2017, setting borrowing costs for more than a third of the world economy. At least 10 other central banks also deliver decisions this week.
Changes in policy rates ripple through the economy, affecting employment, output and the price of goods and services. Officials at the Fed have envisioned rates slowly creeping upward in a way that puts the economy near full employment with inflation averaging around 2%.
The tightening will still leave rates low by historical standards and the central banks may ultimately hold fire if inflation stays weak.
Make no mistake, the global economy is better placed to ease into the new year, but the simultaneous normalising policies of several systemically-important central banks and the sustainability of pockets of high debt and leverage still leave much room for concerns.
The test for policymakers, including incoming Fed chief Jerome Powell, will be whether they can continue pulling back without derailing demand or rocking asset markets.
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