The world economy in 2018 will put in its best growth performance since the global financial crisis. Most major economies will grow more rapidly. The US economy should accelerate from 2.2 per cent GDP growth in 2017 to 2.5pc growth in 2018. The Euro Area, which looks like achieving 2pc growth this year, should accelerate to 2.5pc next year.
The Australian economy has had a fairly slow recovery in 2017. GDP growth for the full period of 2017 should only be around 2.1pc. This should accelerate sharply to 3pc in 2018. In spite of fast growth, inflation appears to remain under tight control. CPI inflation in the US should fall from 2.1pc in 2017 to 1.9pc in 2018.
In the Euro Area, inflation of 1.5pc in 2017 will be followed by only a 1.2pc increase in the harmonised European CPI in 2018. Inflation in Australia will be stable with a 2pc increase in the CPI in 2017 followed by a CPI increase of only 2.3pc in 2018.
Major developing economies look just as good. China, which is growing at a 6.8pc growth rate in 2017, should follow that up with at least 6.6pc growth in 2018. India should accelerate from 6.7pc growth in 2017 to 7.4pc in 2018. This year for the first time we have begun to look at the major economy immediately to our north. Indonesia should accelerate from 5.1pc growth in 2017 to 5.3pc growth in 2018.
The Euro Area
The best model that we can construct of activity in the Euro Area is based on the business sentiment indicator published every month by the European Commission. As business sentiment rises, investment rises. As investment rises, output rises. As output rises, employment rises. We believe the Euro Area economy is growing as fast as it was in 2011, in the recovery from the financial crisis and almost as fast as it was in 2006, in the period of great prosperity before the financial crisis.
Europe is now taking up its great stock of unemployed workers. Unemployment has fallen from a peak of 12pc in 2014 to a level of only 9pc now. This is still a level of unemployment when we compare it to the level of just over 4pc in the US. Europe will continue to grow long after the US has already put all of its unemployed back to work. We are looking at a period of years when the Euro
Area economy will be growing significantly faster than the US. We think this could result in a surprisingly strong Euro.
The US$ will be significantly weaker than what we expect against other major currencies. This benign outlook for the US$ provides the opportunity for a recovery in US$ commodity prices.
Equities market
The strength of the US economy is generating continued upward pressure on US corporate profits. There continues to be a steady appetite for equities. Relatively low interest rates, together with strong earnings, provide continued upward pressure for equities.
In Australia, earnings are beginning to recover from a long flat period. That recovery in earnings, together with a very liquid international capital market, should support a stronger outlook for Australian equities. We estimate fair value for the ASX200 is now 6200 points. We believe the ASX200 will reach that level no later than April 2018.
- Boh Burima, Financial Adviser (Authorised Representative: 000341081) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410
