The global economy should continue on a strong global growth path in 2018, but political risks could stand in the way.
That seems to be the key takeaway at the World Economic Forum in Davis, Switzerland this week, where world leaders weighed nationalist and regional concerns with global commercial prosperity.
In analysis released to coincide with the World Economic Forum, IHS Markit said global growth is expected to increase at a rate of 3.3% in 2018 and 3.2% in 2019, at or above the 2017 rate of 3.2% and up from the 2.5% rate in 2016.
“Until recently, the lackluster global recovery was narrowly based on solid, if unexciting, growth in just a few economies–the United States, United Kingdom and Germany,” said Nariman Behravesh, chief economist at IHS Markit. “However, in 2017, the global economy recorded its best growth since 2011, supported by broader foundations, including a turnaround in the economic prospects of the Eurozone, Japan and large emerging markets such as Brazil and Russia.”
In 2017, scenarios of pro-growth populism and protectionist populism were given roughly equal weight, IHS said. Now, while the risks of protectionism remain uncomfortably high, there is growing confidence in the pro-growth policies of key economies, including the U.S. and France, noted Behravesh, adding that sustained and strong economic growth may weaken the allure of populism.
The potential risks the IHS analysis highlighted include a sharper-than-expected rise in interest rates by global central banks leading to damage in confidence, trade friction between the U.S. and its trading partners or mismanaged deleveraging in China, and the low-probability but high-impact risk of a war in the Middle East or on the Korean peninsula.
[Read more about the global economy: World Bank Forecasts Global Economy to Grow 3.1% in 2018, but Warns of Slower Pace Ahead]
Then came some gamesmanship and discord.
Liu He, a key economic adviser to Chinese president Xi Jinping, said Wednesday that the country has “stood firm against all forms of protectionism,” forming a contrast with the U.S.’s America First agenda.
“We are moving economic globalization forward with concrete actions,” Liu said in an address.
While Liu did not mention the U.S. or the Trump administration directly, the pointed comments were a focal point of his speech outlining economic policies designed to transition China from rapid growth toward what he called “high quality” expansion.
Despite a generally upbeat tone in his speech and confidence in “synchronized” global growth, Liu, considered Chinese President Xi Jinping’s most trusted economic adviser, also pointed to risks in financial markets, saying that “deep-seated problems” had not been fixed since the 2008 financial crisis.
“At such a critical moment, we must focus on spillover of the monetary policies of the world’s major economies and changes in the debt, equity and commodity markets,” he said,
Problems such as high debt and “asset bubbles” need to be met with “concerted global efforts,” working “hand-in-hand” with global partners.
Liu said China’s financial system was “basically sound,” but acknowledged that “shadow banking and hidden debt for local governments are serious problems we have to deal with,” giving a commitment to making the country’s financial system “more adaptable.” He pledged to “open up the financial sector” and deepen integration with global trade rules.
On Thursday, Mario Draghi, president of the European Central Bank, was highly critical of U.S. Treasury Secretary Steven Mnuchin, basically accusing him of violating agreements among nations against starting currency wars.
Speaking at a news conference, Draghi said he objected to “the use of language in discussing exchange rate developments that doesn’t reflect the terms of reference that have been agreed.” He quoted from an agreement reached in Washington in October under which countries promised to “refrain from competitive devaluations.”
He was clearly referring to Mnuchin’s remarks on Wednesday at a World Economic Forum panel in which he said a weaker dollar was good for U.S. trade. The comment was interpreted as an effort to talk down the dollar, which could be seen as a breach of the international nonaggression pact on currency rates.
On Thursday, Mnuchin told reporters that his comment had been misunderstood.
“I thought it was actually balanced and consistent with what I’ve said before, which is we’re not concerned with where the dollar is in the short term,” he said. “It’s a very, very liquid market and we believe in free currencies, and that there’s both advantages and disadvantages of where the dollar is in the short term.”
After arriving in Davos, President Trump said during an interview that he wanted “to see a strong dollar” and that Mnuchin’s remarks had been misinterpreted.
Mnuchin’s initial remark arrived at a sensitive time for the eurozone. The euro has reached a three-year high against the dollar as investors anticipate the European Central Bank dialing back its economic stimulus efforts sooner than previously expected due to strong economic indicators, which would mean higher interest rates on the euro.
A strong euro makes products manufactured in the 19-country eurozone more expensive abroad, which could hurt exports and ultimately create a drag on economic growth, experts have said.
Draghi portrayed Mnuchin’s comments as part of a broader deterioration in international etiquette. At a meeting of the central bank’s Governing Council that preceded the news conference, Draghi said, “Several members expressed concern and this concern was broader than simply the exchange rate. It was about the overall status of international relations right now.”
The central bank signaled no changes in policy on Thursday, reiterating that it would continue its stimulus program at least through September to hold down market interest rates and to nudge inflation toward the official target of 2 percent.
Trump broke with precedent by delivering a speech Davos on Friday, saying “America first is not America alone.”
Trump, who has taken the U.S. out of the Trans-Pacific Partnership and is renegotiating the North American Free Trade Agreement, said he favored free trade, provided that abusive trade practices by other countries were curbed.
Trump eschewed his often-nationalistic comments and policy goals and opted for a somewhat more global tone. Trump instead portrayed the U.S. and other nations as having common interests.
“When the United States grows, so does the world,” he said, adding that the U.S. was “lifting up forgotten communities” and was fulfilling the dreams of Americans for “a great job, a safe home and a better life for their children.”
The president also took credit for the bullish stock market and claimed his policies are making the U.S. a more attractive place to invest, adding, “America is open for business and we are competitive once again.”
Trump made no mention of China when discussing trade or politics, only saying, he would “always put America first, just as the leaders of other countries should put their countries first.”
“When the United States grows, so does the world,” he added.