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The global economy: firing on all cylinders

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AR011058 01/2018

Stewart Robertson

Stewart is a senior economist at Aviva Investors, responsible for our economic research and analysis of the UK and main European markets. Holding a BA and MSc in economics, Stewart’s expertise is invaluable in helping our customers prepare for the future.

The global economy is once again firing on all cylinders

Everybody can recount particular moments that have shaped their lives: the chance meeting that led to a lifelong friendship, a job offer, or even marriage! But certain events can also reverberate across an entire nation – or even the world. The global financial crisis (GFC) that began in late 2007 certainly falls into the latter category. It has exerted an enormous influence on politics, economics, finance and societies over the past decade.

But there are signs the GFC’s gravitational pull has finally started to wane, as the global economy regains its pre-crisis vigour. Global growth disappointed for many years after the GFC, but there are reasons to be more optimistic about the outlook. This is because the broad-based, synchronised upswing that began a year ago shows no signs of easing up, and the robust growth seen in many advanced economies should extend to developing economies in 2018. That should see global growth approach 4%; the strongest pace seen since 2011.

Last year certainly proved a much better year than seemed likely. This largely reflects much stronger-than-anticipated growth in the euro-zone, but also much superior-than-expected outturns in Japan and China. Even President Trump’s failure to deliver on much-vaunted tax reform plans until the end of 2017 failed to have much of an impact.

Moreover, and despite the likelihood of strong growth in 2018, I expect global consumer price inflation will be a little higher this year. Unemployment in some economies, such as the US, the UK and Japan, is below the levels seen prior to the GFC, and should fall further.

So what does all this mean for financial markets and for investors? Central banks have pumped trillions of dollars into the system in the past decade to support economies, and have also kept interest rates at historically low levels to encourage borrowing. Much of the money has flowed into financial markets. Now the global economy is clearly on the mend, that life support will gradually be withdrawn. This means investors will have to be much more discerning in deciding where to put their money.

So although expectations of stronger global growth and modestly higher inflation in 2018 should support equities, the fundamentals that drive markets and companies will come under much greater scrutiny. Looking to 2018, we think that among the main regions, emerging market equities should benefit most from the improving global growth outlook, while relatively attractive prices should also lure buyers.

Among developed markets, we expect euro-zone equities to gain support from the improving economic background and receding political concerns. We also feel Japanese equities present a good opportunity in 2018, with the potential for strong corporate profitability against an improving economic background.

The prospect of higher interest rates around the world suggests the outlook for bond investors is less pleasing. The price of government bonds in the euro-zone and Japan are most likely to come under downward pressure, but high quality corporate bonds could also be facing a challenging time.

Overall however, maybe we should simply focus on the fact that 10 years after the GFC threatened to plunge the world into a new Great Depression, we can finally start to look forward again.

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