The world economy will feel almost healthy in 2018. Ten years after the start of the Great Recession—and after the decade of economic malaise that followed—a sense of widespread wellness will begin to take hold. Deflation has been banished, wages are edging higher and economies are growing almost everywhere. Even central bankers, who have been profligate money-printers of late, will start to act more like, well, bankers, carefully considering where to put their cash. Just in time, then, for a new worry. As the recovery settles in, might 2018 set the stage for the next recession?
Global output in 2017 grew at the fastest pace since 2010, but the year was hardly buoyant. Global growth (at market exchange rates) chugged along at 2.9%, below the 3% that was once considered just average. Growth in 2018 will be a bit slower, at 2.7%, but that hides a more encouraging reality: all of the big economies, developed and emerging, will be moving ahead. America and the European Union will both grow by a respectable 2% or so, Brazil and Russia are out of their latest recessions, once-tigerish Asian economies such as Indonesia and Malaysia will muster a peppy 5%, and India will race along at nearly 8%. Only debt-ridden China looks genuinely worrying, but the masters of the Middle Kingdom will still stoke enough demand to push growth to nearly 6%.
The euro area has been a pleasant surprise. It endured two recessions in the past decade and survived a near break-up; now it almost has a spring in its step. Consumer borrowing is surging, economic sentiment is at a ten-year high and unemployment is falling—it will drop to 8.5% in 2018, from 12% as recently as 2013. Europe will not exactly be booming; ageing populations and low investment will hold it back, and Brexit will hang over the future of the wider EU. But the new year will start with a feeling not of crisis but of normality.
In America, President Donald Trump’s promises of massive tax cuts and trillion-dollar infrastructure programmes have not materialised. Although he will continue to push both, the economy will fail to surge by the sustained 3% that Mr Trump wants. Too many people have left the workforce and companies are not investing nearly enough. But the jobs market is healthy and wages are ticking up, so the expansion will keep going.
Emerging markets will have their best year since 2014. Brazil is wracked by scandal and Russia is suffering under Western sanctions, but both will nonetheless grow by around 2% each—unexciting, but a big improvement from recent slumps. Nigeria and South Africa have also emerged from recessions, although sub-Saharan Africa overall will grow by just 3%, below the 5% average from 2005 to 2015.
China will be the wild card. President Xi Jinping finally seems committed to deflating the country’s bubble economy. The government has already started cutting industrial capacity and reducing property inventories; the next step is to let interest rates rise. The current five-year plan, which runs to 2020, calls for the economy to grow at an average annual rate of 6.5%. China will fall short of that in 2018 as borrowing is curbed and debt cut. All of this could still go horribly wrong; popping asset bubbles has been a messy business in other countries. But the government’s control of the banks, and the money it can spend if trouble looms, make a bust unlikely in 2018.
Sync and swim
So why worry? Why not just enjoy a rare year of synchronised global expansion? The concern begins with history. If it is any guide (and it often is), the business cycle is coming to an end. The world economy tends to tip into a recession every eight to ten years, and the last one ended in 2009.
Recessions typically start when central banks, eager to keep economies in check, raise interest rates too far and too fast. On cue, America’s Federal Reserve will probably raise rates three times in 2018 after three increases in 2017. The Fed will also begin unwinding the enormous pile of assets it acquired during the slump. Although the Fed has promised to move carefully, higher American interest rates are the canary in the coal mine of the global economy. They foretell an end to credit cycles as indebted companies and consumers default in greater numbers, and they presage big capital outflows from emerging markets. Higher interest rates can also produce big corrections in stockmarkets; one index of global equity prices doubled between 2010 and 2017. To many it may feel as if 2018 is just the beginning of the real recovery. In fact, it may be approaching the end.