EY s Global Economic Outlook Ireland January 2018
The global economy is healthy Mark Gregory Chief Economist, UK mgregory@uk.ey.com linkedin.com/in/markgregoryuk Neil Gibson Chief Economist, Ireland neil.gibson1@ie.ey.com linkedin.com/in/neilgibsonuk It is easy to be drawn into the endless speculation over Brexit and to become very gloomy about the economic outlook. This would be a mistake, as outside the UK, the global economy is in good shape, with positive momentum heading into 2018 on the back of a much-improved performance in 2017. The growth outlook is broad-based with stronger domestic demand evident across many regions. We are also seeing strong manufacturing activity and this is boosting the export performance of those countries that are heavily integrated into global supply chains. At the same time, oil and commodity exporters are benefitting from a firming of prices. This virtuous combination of healthy domestic demand and elevated exports should stimulate business investment in 2018, creating the base for ongoing expansion. The impact of positive global growth is apparent across the island of Ireland. In the Republic of Ireland, it is complementing a strong domestic economy and this is resulting in growth which is likely to exceed 5% in 2017 and 3.5% in 2018, placing Ireland amongst the fastest growing major economies in the world. In Northern Ireland global growth and the post referendum depreciation in sterling have helped boost exporters and driven increased levels of cross border retail spending. However, overall growth is held back by the domestic pressures of falling real wages and continued government spending constraint. The region continues to trail slightly below UK growth which is projected to have grown at 1.8% in 2017 and set to fall back to 1.5% in 2018. At a time when Brexit can dominate economic discussion, it is important that clients do not miss out on the opportunities presented by a strong global outlook. The level of growth in Ireland is leading to accelerating talent and cost pressures that will rise up the corporate agenda in 2018. Helping our clients navigate all of the challenges, whilst retaining an opportunity focussed mind-set, is vital. Though economic conditions are more challenging in the UK and Northern Ireland, positive global conditions will still present substantial opportunities in the year ahead. We are grateful to the EY ITEM club for their support in pulling together this assessment of the major global economies in 2018. 1 EY s Global Economic Outlook Ireland January 2018
Summary of international forecasts Real GDP Inflation (% year) (% year) 2016 2017 2018 2016 2017 2018 US 1.5 2.3 2.8 1.2 2.2 2.2 Eurozone 1.8 2.4 2.2 0.2 1.5 1.4 UK 1.9 1.8 1.5 0.6 2.7 2.5 Japan 0.9 1.8 1.7 0.1 0.4 0.7 Canada 1.4 2.9 2.0 1.4 1.6 2.2 China 6.7 6.8 6.4 2.0 1.6 2.3 India 7.9 6.2 7.4 4.9 3.2 5.3 Brazil 3.5 1.1 2.5 8.7 3.4 4.1 Russia 0.2 1.9 1.8 7.0 3.7 4.0 Turkey 3.2 7.0 3.8 7.8 11.1 9.6 World 2.4 3.0 3.2 3.0 3.0 2.9 Source: EY ITEM Club and Oxford Economics EY s Global Economic Outlook Ireland January 2018 2
with a significant corporate pick-up in the USA GDP in the USA could reach a growth rate of 2.8% in 2018, a significant rise from 2.3% in 2017. This is likely to be driven primarily by business investment and exports as the strong global growth and competitive dollar support exports. By contrast, slower employment gains, slightly higher inflation and rising interest rates will likely force consumers to dial back their outlays. % 15 US: Durable goods and investments 10 5 0-5 -10-15 -20-25 1994 1997 2000 2003 2006 2009 2012 2015 Source: Haver Analytics Core capital goods shipments Non-residential business investment 3 EY s Global Economic Outlook Ireland January 2018
Much has been made of the recent approval of tax changes, including a reduction in the headline corporate tax rate from 35% to 21%, and this fiscal stimulus package could add 0.4% to GDP growth in 2018. Even though the Fed is likely to raise interest rates by 25 basis points three times in 2018, as it did in 2017, starting in March, the net impact of the policy will be to boost growth. The USA has momentum, and business investment is likely to position US corporates well for the technological disruption that is much talked about. With the power of Silicon Valley and high business investment, it is likely that US corporates will be significant competitors in future years. Elsewhere in North America, Canada is likely to have slower GDP growth of 2.0% in 2018 compared to 2.9% in 2017. Canadian consumers are facing falling levels of savings as income growth has not kept up with spending. In Latin America, growth is forecast to improve to 2.5% in 2018 from 1.2% in 2017. All countries are seen as growing faster in 2018 except Mexico, where growth is likely to be flat. Recoveries have been largely firming in Latin America and have become increasingly broad-based as investment improves. Higher oil and commodity prices, as well as a softer dollar and healthy global trade, are supporting growth. EY s Global Economic Outlook Ireland January 2018 4
only a moderate slowing in China Headline growth in China is expected to ease back slightly to 6.4% in 2018 from 6.8% in 2017, as policymakers focus on reducing financial risk and deleveraging part of the financial system while aiming for a gradual easing of credit growth. This is important to head off the risk of a debt-led crisis Chinese debt has grown significantly in recent years. China s economy saw stronger-than-expected growth of nearly 6.9% in the first nine months of 2017, underpinned by a recovery in its manufacturing and industrial sectors thanks to a Government-led infrastructure spending spree, a resilient property market and strong exports. Domestic demand may ease in 2018, in part reflecting tighter monetary and fiscal policies but primarily due to lower real estate and infrastructure investment. Consumption growth may ease slightly on moderating real wage growth and a less buoyant property market, but it should remain solid. % GDP 300 250 200 China: outstanding debt Central Government Local Government Non-financial Corporations Financial Sector Households 150 100 50 0 2007 2010 Source: Oxford Economics/Haver Analytics 2013 2014 2015 2016 5 EY s Global Economic Outlook Ireland January 2018
and continuing forward momentum in the Eurozone Eurozone GDP is likely to turn out around 2.4% in 2017, the highest for a decade. The year 2017 ended with a positive outlook as overall consumer and business confidence in December were at their highest levels since October 2000. Growth of 2.2% looks readily achievable in 2018, establishing the recovery as firmly rooted. The improvement has been widespread, with Germany and Spain having strong third quarters and France and Italy also ahead of recent performance. Most promising is the marked improvement in labour markets the October Eurozone unemployment rate was down to 8.9%, the lowest since January 2009. With growing export markets, a still very accommodative European Central Bank (ECB), improving lending, and fiscal policy essentially neutral or even marginally stimulative (as most economies have completed their fiscal adjustment), the Eurozone is in much better shape than for some time. The challenge now is for Eurozone (and EU) policymakers to seize the initiative and press ahead with growth-friendly reforms. There is still spare capacity, and monetary policy by the ECB will remain supportive, creating a window to push through changes in product and labour markets to position the currency bloc for future growth. Eurozone: Investment and capacity utilisation % Year % 10 90 5 85 0 80-5 Investment % y/y (LHS) Capacity Utilisation (RHS) 75-10 70-15 65 1996 1999 2002 2005 2008 2011 2014 2017 Source: Haver Analytics EY s Global Economic Outlook Ireland January 2018 6
and emerging Europe Emerging Europe likely grew by around 4.6% in 2017, and a similar outturn is on the cards for 2018. This is the best performance since 2007, driven by record low unemployment and surging wages fuelling consumption, alongside a rebound in EU-funded investment. In addition, strong Eurozone activity is fuelling export demand, most notably for electronics and cars, with much of the demand for the latter stemming from Germany, to which the Central and Eastern Europe (CEE) economies send about 20% of their exports. 7 EY s Global Economic Outlook Ireland January 2018
and the return of the BRIs We have heard little of the BRICs in recent years. China has continued its strong performance but the rest of the group have achieved more variable results. India is the strongest of the three economies, with growth recovering, but both Russia and Brazil have seen a pick-up in activity. India s growth is being led by a broad-based pick-up in domestic demand. The ongoing simplification of Goods and Services Tax (GST) rates and efforts to reduce the compliance burden suggest that consumption, investment and services will gain momentum going forward, pushing GDP growth back above 7% in 2018. A number of recent policy developments will boost business sentiment and encourage credit and investment growth, and these include a massive (US$32 billion) bank recapitalisation plan, the new Bharatmala infrastructure programme and a substantial improvement in the Ease of Doing Business rankings (from 130 to 100). Lower interest rates have also helped growth the central bank cut interest rates by 200 basis points between January 2015 and August 2017, taking the base rate down to 6.0% (the lowest since November 2010). This monetary easing has now almost certainly finished as inflation jumped to 4.9% in November from 3.6% in October, taking it back above the central bank s 4% target level. It is likely that the central bank may start edging interest rates up in the second half of 2018. In November 2017, Moody s upgraded India s sovereign credit rating for the first time in nearly 14 years, saying that continued progress on economic and institutional reforms would boost its growth potential. Russian activity is being helped by firmer oil prices, low inflation and lower interest rates the Russian central bank cut its key rate from 10% to 7.75% during 2017. The preliminary estimates point to Q3 2017 growth of 1.8% year-on-year. The most sluggish sectors were construction and industrial production, while retail growth continued to strengthen. The GDP growth forecast of 1.8% in 2018 is similar to the estimated 2017 outturn of 1.9%. Monetary policy easing, higher oil prices and solid consumption growth will all help overall growth in 2018. Low inflation and a pick-up in credit growth will help ensure that consumption becomes a key driver of growth next year, while the hosting of the World Cup will provide an additional boost. However, any upside is limited, given that sanctions are expected to remain in place in 2018 and the investment projects for the World Cup have already been completed. A cautious approach to Russia is still the most sensible one, despite the recent improvement. Brazilian GDP grew 6.3% annualised in Q3 2017, up from 5.7% in Q2. The level and composition of growth has been improving each quarter since Brazil exited its longest recession in history at the start of 2017. The Q3 expansion was very broad-based, which shows the recovery is indeed gaining pace and becoming more sustainable. Growth will be supported in 2018 by accommodative monetary policy. The central bank cut interest rates to an all-time low of 7% in December, and inflation below 3% is helping to boost real incomes. In addition, exports are benefitting from healthy global growth and trade as well as firmer commodity prices. Despite the improving outlook, political uncertainty is likely to continue to influence activity levels and many firms may postpone large investment decisions until after the October 2018 elections. Additionally, continuing low levels of business confidence and abundant spare capacity point to a gradual, rather than a V -shaped, recovery in investment, which has fallen by 30% since 2013. The result is steady rather than spectacular growth as the most likely outturn for 2018. EY s Global Economic Outlook Ireland January 2018 8
and a strong contribution from Asia The Asian outlook still appears favourable but there is likely to be a slight easing of growth in most countries in 2018 due to expected slower growth in Chinese imports. China is a particularly important export market for most Asian economies and many Asian countries are relatively export-oriented, with a fairly high share of exports in GDP. Indeed, Thomson Reuters survey showed business confidence among Asian companies at a near seven-year high in October December, led by Australia, China and South Korea. Confidence was also strong in Indonesia and Thailand. Japanese growth is likely to be little changed at 1.7% in 2018, compared to 1.8% in 2017. GDP grew at an annualised rate of 2.5% in Q3 2017, led by net exports, and this was the seventh successive quarter of growth. Domestic demand is expected to be more of a growth driver in 2018, helped by monetary and fiscal policy stances. Strong employment growth will help consumer spending, and high business confidence, decent activity, strong corporate profits and tight labour markets should all support investment. 9 EY s Global Economic Outlook Ireland January 2018
with upside There is potential for growth to surprise on the upside in Europe and Emerging Markets overall and we believe that business investment could also be stronger than our base case. If inflation is lower than expected in 2018, this would provide further support to consumer spending and lead to central banks tightening monetary policy even more gradually, further boosting activity. and downside risks. But there are downside risks, most obviously sustained significantly higher oil prices which could choke off business and consumer spending. Policy could also impact performance with more aggressive than expected monetary policy normalisation in 2018 a possibility, and the risk of increasing frictions in trade, especially between the USA and China. As far as shocks go, there are risks of a major asset sell-off given that the FTSE ALL-World Share Index rose nearly 22% in 2017, and debt levels in China and some Emerging Markets are high and could lead to problems. However, it is geopolitical uncertainties that are hardest to assess, with North Korea, Catalonia, the Italian elections, an extended period in forming a German government and the Brexit negotiations all having the potential to hit confidence. EY s Global Economic Outlook Ireland January 2018 10
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