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Global Economic Perspectives
Global Economic Outlook 2018-2019
Nothing will change, yet everything will be different
The main engines of the global growth pick-up in 2017 were Chinese property, US
shale, and the wider commodity rebound (including Brazil and Russia emerging from
recession). Those engines are starting to sputter, so substantial growth rotation is
necessary in 2018 to sustain the current 3.8% global growth pace. The surveys have
been suggesting for a while that it will happen, but we're still waiting.
Recovery to date seems mile wide but inch deep
The global recovery is broad-based by number, but much of the improvement is owed
to a handful of commodity producers. The commodity rebound accounts for nearly all
of the inflation normalization in DM, about 80% of the global trade normalization, and
about 70% of the global growth acceleration (almost the entire US acceleration in
2017 was energy investment). We expect Brazil and India to provide the largest boost
to growth in 2018, helping to offset modest slowdowns in over half of the countries in
our coverage universe (including heavily-weighted China, the Eurozone and Canada).
Energy is to global investment, as China is to global trade
The recovery in the Chinese property sector helped jumpstart EM import volumes
(China accounted for about 30% of that acceleration). With property now slowing
alongside infrastructure investment, we project a 200bp drop in QoQ annualized
growth between Q2-17 and Q2-18. Compensating mechanisms will kick in, but the
import intensity of growth will drop. We doubt DM will fully pick up the slack and
therefore see global trade growth slowing about 60bp.
Inflation is not dead, just sleeping
Twenty per cent of the countries we cover have already closed their output gaps and
we see the first stirrings of wage and price pressures. The transitory weakness in core
inflation in the US is an outlier: the number of countries with increasing core inflation is
at its highest since 2011. The process is still slow for most, but there are notable
exceptions: wage growth in Central Europe has doubled over the last few quarters, and
we view Japan as being on the cusp of a substantial pick-up in inflation.
Where do we deviate from 2018 consensus
We are -20bp below consensus on US and UK growth, +70bp above consensus on
Japan's growth and inflation, +10bp above consensus on Eurozone growth, and +70bp
above consensus on Brazil's growth. We continue to project that the Fed will resume
buying US Treasuries in three years' time, and that by 2025 it will hold US$1 trillion
more UST than it does today.
What can go right
The biggest upside risks to our forecast are (i) a larger-than-expected tax cut in the US,
and (ii) abating policy uncertainty on both sides of the Atlantic leading to a much
stronger investment response.
What can go wrong
The largest downside risks are (i) a failure of global non-energy investment to pick up
from where this year's commodity rebound left off; (ii) running out of labour-market
slack, forcing markets to sharply reprice inflation risks and the pace of policy
normalization; (iii) growth disappointment, for example in the US, due to a combination
of a collapse in NAFTA talks, failed attempts at tax reform, or large retail bankruptcies.
Economics
Global
Arend Kapteyn
Economist
arend.kapteyn@ubs
+44-20-7567 0531
Seth Carpenter
Economist
seth.carpenter@ubs
+1-212-713 4173
Reinhard Cluse
Economist
reinhard.cluse@ubs
+44-20-7568 6722
Rafael De La Fuente
Economist
rafael.delafuente@ubs
+1-203-719 7127
Gyorgy Kovacs
Economist
gyorgy.kovacs@ubs
+44-20-7568 7563
Pierre Lafourcade
Economist
pierre.lafourcade@ubs
+1-203-719 8921
James Malcolm
Economist
james.malcolm@ubs
+81-3-5208 6214
Edward Teather
Economist
edward.teather@ubs
+65-6495 5965
George Tharenou
Economist
george.tharenou@ubs
+61-2-9324 3520
Tony Volpon
Economist
tony.volpon@ubs
+1-55-11-2767 6337
Tao Wang
Economist
wang.tao@ubs
+852-2971 7525
Global Economic Perspectives6 November 2017
Contents
Nothing will change, yet everything will be different ..... 6
Surprising features of this recovery .. 7
Positive survey signals and the comingend of the debt super-cycle ........... 11
Where does this leave our 2018-2019 forecasts ... 13
(Core) Inflation is slowly awakening ........... 17
Central Bank Outlook ........ 23
10 years on – where do we stand25
Has Policy Space been Recouped.. 29
Goldilocks interrupted: Global Scenarios and Tail Risks ...... 32
An alternative way of measuring whether we are in a synchronized upswing
...... 41
Political Calendar 2018-2019 ......... 46
USA & Canada ....... 56
Latin America ........ 70
Western Europe .... 98
Emerging Europe134
China ........ 164
Asia .......... 172
Asia Forecast Table ......... 181
Australia & New Zealand206
Global Economic Perspectives6 November 2017
Global
Arend Kapteyn
Economist
arend.kapteyn@ubs
+44-20-7568-2000
Pierre Lafourcade
Economist
pierre.lafourcade@ubs
+1-203-719-8921
Global Economic Perspectives6 November 2017
Global Economy Outlook 2018-19
UBS Research THESIS MAP 2018-19 Global Economic Outlook
PIVOTAL QUESTIONS Q: Are we speeding up or slowing down
Neither. The main engines behind the global growth acceleration in 2017 (Chinese property, US shale
and the wider commodity rebound) are starting to sputter. Significant rotation needs to take place
from energy to non-energy investment to sustain the current 3.8% growth pace. The surveys suggest
that may happen, but we haven't seen it yet.
Q: Is inflation in permanent hibernation
No. You should view global inflation through the lens of transitory weakness in US core inflation at
your own peril. The US is an outlier and the number of countries with increasing core inflation is at its
highest since 2011. The process is still slow for most, but there are notable exceptions: wage growth in
Central Europe has doubled over the last few quarters, and we view Japan as being on the cusp of a
substantial pick-up in inflation.
Q: What are the main risks to the outlook
- The biggest upside risks to our forecast are (i) a larger-than-expected tax cut in the US, and (ii) abating
policy uncertainty on both sides of the Atlantic leading to a much stronger investment response.
- The biggest downside risks are (i) a failure of global non-energy investment to pick up from where
this year's commodity rebound left off; (ii) running out of labour-market slack, forcing markets to
sharply reprice inflation risks and the pace of policy normalization; (iii) growth disappointment, for
example in the US, due to a combination of a collapse in NAFTA talks, failed attempts at tax reform, or
large retail bankruptcies.
UBS VIEW We expect growth and inflation close to current levels, but with significant deviations from consensus in
the details. We are -20bp below the growth consensus for the US and UK, and +70bp above consensus
for Japan, +70bp for Brazil and +10bp for Europe.
EVIDENCE & SIGNPOSTS
Survey optimism needs to materialize into more investment, particularly in Europe and the US.
Otherwise, global growth and trade volumes next year will slow.
WHAT'S PRICED IN
Goldilocks: a low-for-longer environment (no inflation pressure, limited monetary policy
accommodation) and durability of current growth momentum.
Figure 1: Growth Scenarios Global Figu