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World Economic Outlook
World Economic Outlook Update, January 2018
January 2018
World Economic Outlook
The Global Recovery Has Strengthened
The cyclical upswing underway since mid-2016 has continued to strengthen. Some 120 economies, accounting for three quarters of world GDP, have seen a pickup in growth in year-on-year terms in 2017, the broadest synchronized global growth upsurge since 2010. Among advanced economies, growth in the third quarter of 2017 was higher than projected in the fall, notably in Germany, Japan, Korea, and the United States. Key emerging market and developing economies, including Brazil, China, and South Africa, also posted third-quarter growth stronger than the fall forecasts. High-frequency hard data and sentiment indicators point to a continuation of strong momentum in the fourth quarter. World trade has grown strongly in recent months, supported by a pickup in investment, particularly among advanced economies, and increased manufacturing output in Asia in the run up to the launch of new smartphone models. Purchasing managers’ indices indicate firm manufacturing activity ahead, consistent with strong consumer confidence pointing to healthy final demand.
Commodities and inflation. An improving global growth outlook, weather events in the United States, the extension of the OPEC+ agreement to limit oil production, and geopolitical tensions in the Middle East have supported crude oil prices. These have risen by about 20 percent between August 2017 (the reference period for the October 2017 WEO) and mid-December 2017 (the reference period for the January 2018 WEO Update), to over $60 per barrel, with some further increase as of early January 2018. Markets expect prices to gradually decline over the next 4–5 years—as of mid-December, medium-term price futures stood at about $54 per barrel, modestly higher than in August. The increase in fuel prices raised headline inflation in advanced economies, but wage and core-price inflation remain weak. Among emerging market economies, headline and core inflation have ticked up slightly in recent months after declining earlier in 2017.
Bond and equity markets. Market expectations of the path of U.S. Federal Reserve policy rates have shifted up since August, reflecting the well‑anticipated December rate hike, but they continue to price in a gradual increase over 2018 and 2019. The Bank of England raised its policy rate for the first time since 2008 in view of diminishing slack in the economy and above‑target inflation driven by the past sterling depreciation; the European Central Bank announced that it will taper its net asset purchases starting in January. The ECB intends, however, to maintain policy rates at current historically low levels until after quantitative easing ends and, should inflation underperform, extend the asset purchase program in amount and duration. Bond market reaction to these shifts has been muted, with yield curves tending to flatten as short-term rates have risen more than longer-term rates (e.g., in the United States, United Kingdom, and Canada), consistent with still-subdued market expectations of sustained upside surprises on inflation. Equity prices in advanced economies continued to rally, buoyed by generally favorable sentiment regarding earnings prospects, expectations of a very gradual normalization path for monetary policy in a weak inflation environment, and low expected volatility in underlying fundamentals. Emerging market equity indices have risen further since August, lifted by the improved near-term outlook for commodity exporters. In some cases, long-term yields have inched up in recent months, but they generally remain low, and interest rate spreads remain compressed.
Exchange rates and capital flows. As of early January 2018, the U.S. dollar and the euro remain close to their August 2017 level in real effective terms. The Japanese yen has depreciated by 5 percent on widening interest differentials, while the sterling has appreciated by close to 4 percent as the Bank of England raised interest rates in November and as expectations of a Brexit deal rose. Across emerging market currencies, the renminbi has appreciated by around 2 percent, the Malaysian ringgit has rebounded by about 7 percent on an improved growth outlook and stronger commodity prices, and the South African rand by close to 6 percent onperceptions of reduced political uncertainty. In contrast, the Mexican peso has depreciated by 7 percent owing to renewed uncertainty associated with the ongoing NAFTA negotiations and the Turkish lira by 4.5 percent on higher inflation readings. Capital flows to emerging economies have remained resilient through the third quarter of 2017, with continued strength in non-resident portfolio inflows.
Global Growth Forecast to Rise Further in 2018 and 2019
Global growth for 2017 is now estimated at 3.7 percent, 0.1 percentage point higher than projected in the fall. Upside growth surprises were particularly pronounced in Europe and Asia but broad based, with outturns for both the advanced and the emerging market and developing economy groups exceeding the fall forecasts by 0.1 percentage point.
The stronger momentum experienced in 2017 is expected to carry into 2018 and 2019, with global growth revised up to 3.9 percent for both years (0.2 percentage point higher relative to the fall forecasts).
For the two-year forecast horizon, the upward revisions to the global outlook result mainly from advanced economies, where growth is now expected to exceed 2 percent in 2018 and 2019. This forecast reflects the expectation that favorable global financial conditions and strong sentiment will help maintain the recent acceleration in demand, especially in investment, with a noticeable impact on growth in economies with large exports. In addition, the U.S. tax reform and associated fiscal stimulus are expected to temporarily raise U.S. growth, with favorable demand spillovers for U.S. trading partners—especially Canada and Mexico—during this period. The expected global macroeconomic effects account for around one-half of the cumulative upward revision to the global growth forecast for 2018 and 2019, with a range of uncertainty around this baseline projection.
The aggregate growth forecast for the emerging markets and developing economies for 2018 and 2019 is unchanged, with marked differences in the outlook across regions.
Risks
Risks to the outlook are broadly balanced in the near term, but—as in the October 2017 WEO—remain skewed to the downside over the medium term. One notable threat to growth is a tightening of global financing terms from their current easy settings, either in the near term or later.
In the near term, the global economy is likely to maintain its momentum absent a correction in financial markets—which have seen a sustained run-up in asset prices and very low volatility, seemingly unperturbed by policy or political uncertainty in recent months. Such momentum could even surprise on the upside in the near term if confidence in the global outlook and easy financial conditions continue to reinforce each other.
The reaction of longer-term bond yields and the U.S. dollar to the change in U.S. tax policy appears to have been limited so far, and markets currently anticipate a more gradual pace of monetary policy tightening than incorporated into the WEO baseline. A financial market correction could be triggered, for example, by signs of firmer inflation in the United States, where the boost to demand will exert downward pressure on the already very low unemployment rate. Higher inflation pressure, together with faster Fed policy rate tightening than anticipated in the baseline, could contribute to a larger decompression of term premiums in the United States, a stronger U.S. dollar, and lower equity prices. The tightening of global financial conditions would have implications for global asset prices and capital flows, leaving economies with high gross debt refinancing needs and unhedged dollar liabilities particularly exposed to financial distress.
Also on the downside, the response of U.S. investment to tax policy changes could be more modest than envisaged in the baseline, with attendant repercussions on the strength of external demand for the main U.S. trading partners.
Over the medium term, a potential buildup of vulnerabilities if financial conditions remain easy, the possible adoption of inward-looking policies, and noneconomic factors pose notable downside risks.
Policies
Two common policy objectives tie advanced, emerging, and developing economies together. First, the need to raise potential output growth—through structural reforms to lift productivity and, especially in advanced economies with aging populations, enhance labor force participation rates—while making sure that the gains from growth are shared widely. Second, the imperative to increase resilience, including through proactive financial regulation and, where needed, balance sheet repair and strengthening fiscal buffers. Action is particularly important in a low-interest-rate, low-volatility environment with potential for disruptive portfolio adjustments and capital flow reversals. The current cyclical upswing provides a unique opportunity for structural and governance reforms.
Against a backdrop of common priorities, the optimal policy mix differs across countries depending on cyclical considerations and available policy space:
Cooperative multilateral effort remains vital to safeguard recent momentum in global activity, strengthen medium-term prospects, and ensure the benefits from technological progress and global economic integration are shared more widely. Priority areas include continuing the financial regulatory reform agenda; avoiding competitive races to the bottom in taxes, labor, and environmental standards; modernizing the rules‑based multilateral trade framework; strengthening the global financial safety net; preserving correspondent banking relationships; curbing cross-border money laundering, organized crime, and terrorism; and mitigating and adapting to climate change.
| Table 1. Overview of the World Economic Outlook Projections | |||||||||||
| (Percent change unless noted otherwise) | |||||||||||
| Year over Year | |||||||||||
| Q4 | over Q4 2/ | ||||||||||
| Estimate | Projections | Difference from October 2017 WEO Projections 1/ | Estimate | Projections | |||||||
| 2016 | 2017 | 2018 | 2019 | 2018 | 2019 | 2017 | 2018 | 2019 | |||
| World Output | 3.2 | 3.7 | 3.9 | 3.9 | 0.2 | 0.2 | 3.9 | 3.9 | 3.8 | ||
| Advanced Economies | 1.7 | 2.3 | 2.3 | 2.2 | 0.3 | 0.4 | 2.4 | 2.3 | 2.0 | ||
| United States | 1.5 | 2.3 | 2.7 | 2.5 | 0.4 | 0.6 | 2.5 | 2.7 | 2.4 | ||
| Euro Area | 1.8 | 2.4 | 2.2 | 2.0 | 0.3 | 0.3 | 2.4 | 2.1 | 2.0 | ||
| Germany | 1.9 | 2.5 | 2.3 | 2.0 | 0.5 | 0.5 | 2.8 | 2.1 | 2.1 | ||
| France | 1.2 | 1.8 | 1.9 | 1.9 | 0.1 | 0.0 | 2.2 | 1.8 | 1.9 | ||
| Italy | 0.9 | 1.6 | 1.4 | 1.1 | 0.3 | 0.2 | 1.5 | 1.4 | 0.9 | ||
| Spain | 3.3 | 3.1 | 2.4 | 2.1 | –0.1 | 0.1 | 3.0 | 2.2 | 2.0 | ||
| Japan | 0.9 | 1.8 | 1.2 | 0.9 | 0.5 | 0.1 | 2.0 | 0.9 | –0.3 | ||
| United Kingdom | 1.9 | 1.7 | 1.5 | 1.5 | 0.0 | –0.1 | 1.3 | 1.5 | 1.5 | ||
| Canada | 1.4 | 3.0 | 2.3 | 2.0 | 0.2 | 0.3 | 3.0 | 2.2 | 1.9 | ||
| Other Advanced Economies 3/ | 2.3 | 2.7 | 2.6 | 2.6 | 0.1 | 0.1 | 2.7 | 2.5 | 2.9 | ||
| Emerging Market and Developing Economies | 4.4 | 4.7 | 4.9 | 5.0 | 0.0 | 0.0 | 5.2 | 5.3 | 5.3 | ||
| Commonwealth of Independent States | 0.4 | 2.2 | 2.2 | 2.1 | 0.1 | 0.0 | 2.2 | 2.1 | 1.7 | ||
| Russia | –0.2 | 1.8 | 1.7 | 1.5 | 0.1 | 0.0 | 2.3 | 1.9 | 1.6 | ||
| Excluding Russia | 1.9 | 3.1 | 3.4 | 3.5 | 0.1 | 0.0 | . . . | . . . | . . . | ||
| Emerging and Developing Asia | 6.4 | 6.5 | 6.5 | 6.6 | 0.0 | 0.1 | 6.8 | 6.5 | 6.5 | ||
| China | 6.7 | 6.8 | 6.6 | 6.4 | 0.1 | 0.1 | 6.7 | 6.5 | 6.4 | ||
| India 4/ | 7.1 | 6.7 | 7.4 | 7.8 | 0.0 | 0.0 | 7.9 | 7.4 | 7.8 | ||
| ASEAN-5 5/ | 4.9 | 5.3 | 5.3 | 5.3 | 0.1 | 0.0 | 5.4 | 5.4 | 5.3 | ||
| Emerging and Developing Europe | 3.2 | 5.2 | 4.0 | 3.8 | 0.5 | 0.5 | 4.0 | 4.8 | 3.7 | ||
| Latin America and the Caribbean | –0.7 | 1.3 | 1.9 | 2.6 | 0.0 | 0.2 | 2.2 | 2.3 | 2.6 | ||
| Brazil | –3.5 | 1.1 | 1.9 | 2.1 | 0.4 | 0.1 | 2.5 | 2.2 | 2.0 | ||
| Mexico | 2.9 | 2.0 | 2.3 | 3.0 | 0.4 | 0.7 | 1.4 | 2.9 | 2.8 | ||
| Middle East, North Africa, Afghanistan, and Pakistan | 4.9 | 2.5 | 3.6 | 3.5 | 0.1 | 0.0 | . . . | . . . | . . . | ||
| Saudi Arabia | 1.7 | –0.7 | 1.6 | 2.2 | 0.5 | 0.6 | –1.4 | 2.5 | 2.2 | ||
| Sub-Saharan Africa | 1.4 | 2.7 | 3.3 | 3.5 | –0.1 | 0.1 | . . . | . . . | . . . | ||
| Nigeria | –1.6 | 0.8 | 2.1 | 1.9 | 0.2 | 0.2 | . . . | . . . | . . . | ||
| South Africa | 0.3 | 0.9 | 0.9 | 0.9 | –0.2 | –0.7 | 1.2 | 0.5 | 1.1 | ||
| Memorandum | |||||||||||
| Low-Income Developing Countries | 3.6 | 4.7 | 5.2 | 5.3 | 0.0 | 0.1 | . . . | . . . | . . . | ||
| World Growth Based on Market Exchange Rates | 2.5 | 3.2 | 3.3 | 3.2 | 0.2 | 0.2 | 3.3 | 3.3 | 3.0 | ||
| World Trade Volume (goods and services) 6/ | 2.5 | 4.7 | 4.6 | 4.4 | 0.6 | 0.5 | . . . | . . . | . . . | ||
| Advanced Economies | 2.6 | 4.1 | 4.3 | 4.2 | 0.6 | 0.7 | . . . | . . . | . . . | ||
| Emerging Market and Developing Economies | 2.3 | 5.9 | 5.1 | 4.8 | 0.4 | 0.2 | . . . | . . . | . . . | ||
| Commodity Prices (U.S. dollars) | |||||||||||
| Oil 7/ | –15.7 | 23.1 | 11.7 | –4.3 | 11.9 | –5.0 | 19.0 | –0.9 | –3.9 | ||
| Nonfuel (average based on world commodity export weights) | –1.6 | 6.5 | –0.5 | 1.0 | –1.0 | 1.5 | 1.2 | 1.2 | 1.0 | ||
| Consumer Prices | |||||||||||
| Advanced Economies | 0.8 | 1.7 | 1.9 | 2.1 | 0.2 | 0.1 | 1.6 | 2.1 | 2.1 | ||
| Emerging Market and Developing Economies 8/ | 4.3 | 4.1 | 4.5 | 4.3 | 0.1 | 0.2 | 3.7 | 3.9 | 3.6 | ||
| London Interbank Offered Rate (percent) | |||||||||||
| On U.S. Dollar Deposits (six month) | 1.1 | 1.5 | 2.3 | 3.4 | 0.4 | 0.5 | . . . | . . . | . . . | ||
| On Euro Deposits (three month) | –0.3 | –0.3 | –0.3 | –0.1 | 0.0 | –0.1 | . . . | . . . | . . . | ||
| On Japanese Yen Deposits (six month) | 0.0 | 0.0 | 0.0 | 0.1 | –0.2 | –0.1 | . . . | . . . | . . . | ||
| Note: Real effective exchange rates are assumed to remain constant at the levels prevailing during November 13, 2017-December 11, 2017. Economies are listed on the basis of economic size. The aggregated quarterly data are seasonally adjusted. 1/ Difference based on rounded figures for both the current and October 2017 World Economic Outlook forecasts. Countries whose forecasts have been updated relative to October 2017 World Economic Outlook forecasts account for 94 percent of world GDP measured at purchasing power parity. 2/ For World Output, the quarterly estimates and projections account for approximately 90 percent of annual world output at purchasing-power-parity weights. For Emerging Market and Developing Economies, the quarterly estimates and projections account for approximately 80 percent of annual emerging market and developing economies' output at purchasing-power-parity weights. 3/ Excludes the G7 (Canada, France, Germany, Italy, Japan, United Kingdom, United States) and euro area countries. 4/ For India, data and forecasts are presented on a fiscal year basis and GDP from 2011 onward is based on GDP at market prices with FY2011/12 as a base year. 5/ Indonesia, Malaysia, Philippines, Thailand, Vietnam. 6/ Simple average of growth rates for export and import volumes (goods and services). 7/ Simple average of prices of U.K. Brent, Dubai Fateh, and West Texas Intermediate crude oil. The average price of oil in U.S. dollars a barrel was $52.7 in 2017; the assumed price based on futures markets (as of December 11, 2017) is $59.9 in 2018 and $56.4 in 2019. 8/ Excludes Argentina and Venezuela. |
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