Global Growth Back to Normal

The global economy found its post-crisis footing in 2017, with most major developing economies surprising on the upside.

Comparing 2017 predictions made a year ago versus the likely outturn—based on the latest forecasts in Bloomberg’s monthly survey—shows that the pessimists called this one wrong. One of the biggest surprises was the eurozone, set for its strongest expansion in a decade. At 2.3%, the expected growth is far above the 1.4% pace predicted at the start of the year.

Even the UK, which dropped to the bottom of the Group of Seven growth league, performed a little stronger than was expected. Tempering that small positive is the fact that it’s heading for its fourth straight slowdown in 2018, according to the latest projections.

“It took a decade but the crisis is now behind us,” said Samy Chaar, chief economist at Lombard Odier in Geneva. “The global economy has found a ‘normal’ footing, inflation is starting to come back into the picture—although far from posing a risk—and central banks are able to gradually remove exceptionally supportive policies.”

Some central banks have already started down the path of exiting from stimulus, though very gradually. While the Federal Reserve is forecasting three interest-rate increases in 2018 after three this year, the Bank of England only lifted its benchmark rate for the first time in a decade in November. In euroland, the European Central Bank is slowing—not stopping—its pace of monthly bond purchases.

What Does 2018 Offer?

So what does 2018 have to offer? According to Goldman Sachs, the main risks to the outlook are political, including the struggling Nafta negotiations, North Korea’s nuclear ambitions and elections in Italy. But continued loose monetary conditions will support the expansion.

The global economy is enjoying broad, synchronized growth beyond what anyone expected. The question now is whether this strong performance will continue in 2018.

The answer, of course, will depend on monetary, fiscal, trade and related policies in the United States and around the world. And yet it is hard to predict what policy proposals will emerge in 2018.

There are relatively new heads of state in the US, France and Britain; German leaders still have not formed a governing coalition since the general election in September; and the US Federal Reserve has a new chair awaiting confirmation. Moreover, major changes in important developing economies such as Argentina, Saudi Arabia and Brazil have made the future outlook even murkier.

Still, one should hope for the best. First and foremost, one should hope that synchronized global growth at a rate of just under 4% will continue in 2018, as the International Monetary Fund projected in October. Growth not only raises incomes, but also makes vexing problems such as bad bank loans and budget deficits more manageable. But it is hoped that the global recovery will continue, but at a slightly slower growth rate of around 3.5%.

Cryptocurrencies a Threat?

Most leading European economists believe there’s little reason to worry of the so-called bitcoin bubble. Only 21% of 48 economists polled by the Washington-based Center for Economic Policy and Research believe cryptocurrencies, like bitcoin and etherium, could jeopardize the economy and cause a crisis, Quartz reported.

The top cryptocurrencies are worth about $350 billion—less than the $513 billion market value of Facebook. If they disappeared tomorrow, banks would barely notice. “Despite recent growth, the market cap of cryptocurrencies remains modest, compared to the size of ‘conventional’ financial markets,” argues Robert Kollman, an economist at Universite Libre de Bruxelles. “Cryptocurrencies do not seem to represent a threat to financial stability–for now.”

That’s partly because it’s not so widely used, especially by large investment groups, says Michael McMahon at the University of Oxford. Ethan Ilzetski, of the London School of Economics, agrees: “Bitcoin and other cryptocurrencies remain a toy for a very narrow segment of investors and are detached from the financial system and the real economy.”

According to a 2015 working paper from the European Central Bank, “there is no material risk for any of the central bank’s tasks as yet.”

Crypto remains small partly because it’s costly to use. Visa can process 47,000 transactions a second, compared to the seven-transactions-a-second processing power of bitcoin. Some economists think bitcoin will only be widely adopted if conventional currencies fail.