You could be forgiven for feeling a little confused about the 2018 global economic outlook.
Goldman Sachs has described it as being “as good as it gets”, while Citi has highlighted the evidence of “late cycle froth”.
What is clear is that, for the first time since the financial crisis, there is evidence of both a synchronised economic upturn across the US, Eurozone, and Asian economies, and also equity prices reaching yet new highs, driven by a Trumpian logic which only sees the good news and none of the bad.
In the US, the Shiller cyclically adjusted price earnings ratio has only been higher before the 1929 Wall Street crash and the dot-com boom and bust.
Leverage measures for the US market – such as borrowing-equity as a proportion of GDP – tell a similar story, and highlight concerns that bear markets will follow bull markets, just as seagulls follow trawlers.
These measures are by no means full-proof evidence of a looming asset market decline, but they are serious indicators of the potential for such a downturn.
And the trigger for any downturn could well be political, not economic. Economic synchronisation might be good news, but the scale of political synchronisation is worrying.
Across the globe, political problems abound – the US, Germany, the UK, France, Italy, and Spain – and raise serious questions as to whether the politicians could respond to any economic downturn in the near future. I’m reminded of the joke that politicians and nappies should be changed regularly – and for the same reason.
The goods news, of course, is that expectations are for a strengthening global economy with an end to quantitative easing and a gradual increase in interest rates – but to well below historic norms. All well and good if this proves to be the case, but it might not.
Financial markets are well and truly signed up to the idea that any normalisation of monetary policy will not trigger an asset market deflation. But that is a view, not a certainty.
Closer to home, there is a rich nexus of politics and economics in the UK. In terms of the economic fall-out, Brexit has been the dog that didn’t bark, but that does not mean that we can ignore all political uncertainty. If a Corbyn government began to be considered a serious possibility, financial markets would fall – big time. The political risk premium is heterogeneous not homogenous.
The UK economic outlook looks good, but not exciting. The post-Brexit decline in sterling has helped create an upturn in orders and export orders, and fashion a rebalancing of sorts, with a shift towards net exports and investment and away from consumption.
But it’s not all good news.
The April 2018 increase in employer and employee auto-enrolment contributions will combine with the squeeze in real incomes to moderate consumption. Continued weak broad money supply growth in the UK also strongly suggests more of the same in terms of 2018 GDP growth – in other words growth of just under two per cent this year, the same as in 2016 and 2017.
The downside economic risk is that the impact of any normalisation would be greater than expected, hitting zombie companies and households.
The upside risk is that the output gap is far less than thought, and capacity constraints – in labour and product markets – drive inflation even further above target. But even here there is an offset. If capacity constraints result in higher productivity growth, unit labour costs improvements will reduce the threat of a wage price spiral.