What can we expect in 2018?

Politicians rule, Bitcoin under pressure, and a new central banks order

As 2017 draws to a close, it will be remembered as a positive year for the world economy, with growth momentum accelerating, asset prices on the rise, and scant volatility, according to Yael Selfin, Chief Economist, KPMG LLP. 

Even in the UK, worst case scenarios such as an abrupt early departure from the EU, have been averted (for now at least) – and negotiations on the transitional and final relationships between the EU and the UK are moving ahead. 

Nonetheless, 2017 also marked the UK’s decoupling from the overall positive trend for the world economy. Higher inflation, Brexit-related uncertainty and poor productivity performance have all taken their toll on the UK economy: GDP growth is expected to moderate to 1.5 per cent this year as consumers’ income is squeezed and spending is less forthcoming. We could see much the same GDP growth in 2018.  

Assuming that there are no further major falls in sterling, the inflationary impact from earlier declines, through a rise in the cost of imports, should gradually dissipate. Alas, that is not the only thing on the Bank of England’s mind. Unemployment could slip to 4.2 per cent or even slightly lower next year, which is towards the bottom of the 4 per cent to 4.75 per cent range that the Bank of England now considers as the equilibrium unemployment rate. A tight labour market could put pressure on wages and inflation – although we do not expect wages to rise by more than 2.7 per cent on average next year and anticipate inflation will moderate to 2.3 per cent by December 2018, with an average of 2.6 per cent for the year as a whole. Given current uncertainties, the Bank of England may raise rates only once in 2018 to 0.75 per cent, with an additional one to two further increases later on.      

Just as in 2017, next year presents more risks on the downside than prospects on the upside. Once again, it is political developments that could pose some of the biggest challenges for the world economy. To take just a few examples: a NAFTA negotiation collapse could affect other trade deals; the results of the Italian elections and an unstable German government may weaken the EU; and elections in Mexico and Brazil could create a less favourable business agenda in Latin America. Political risks are particularly heightened in the UK, with a potentially fragile government and an arduous negotiation process to undertake with the EU. 

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