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Robust Global Economy at End of 2017

Robust Global Economy at End of 2017

Monday, 18 December, 2017 - 13:45
Men trading in the US stock market. (Reuters)

It is almost a sure thing now that global economy will record a 3.7 percent increase in the year 2017 due to several factors such as: accommodative global monetary policy, Chinese economy sustaining high levels and oil prices that are beginning to drop.

However, these factors are expected are expected to fade as 2018 begins and the positive effects of all of these drivers are likely to soften, especially with the US Federal Reserve plans to increase rates, and the Chinese economy is likely to slow down after the authorities tightened regulations, especially those pertaining to funding. In addition, higher oil prices are affecting consumer countries.

Back to 2017, the global economy continued to improve in recent weeks. Data in Europe and Japan showed notable strength, and US data continued to come in strong.

US economy benefited from the Senate’s passage of a tax reform bill, though a final reconciled measure will require some additional work if it weren't approved by Congress.

Meanwhile, UK made significant progress on the Brexit agreement with EU, and equities continued to perform well, setting new highs. Despite growth predictions, inflation remained weak.

National Bank of Kuwait Research Center stated that the US economy continued to come in strong, as the latest employment report showed tight labor conditions. Salaries of non-agricultural sector rose in November, though the unemployment rate stayed put at the 17-year low of 4.1 percent.

A number of leading indicators reflected the strength, including capital goods orders and the ISM manufacturing index, showing increased optimism and rising investment. Gross Domestic Product (GDP) also maintained its solid growth after 2017's third quarter GDP growth was revised upward to a solid 3.3 percent in comparison to 3 percent in 2017's second quarter.

Meanwhile, markets continue to await a budget deal in the US as the government debt, again, approaches the mandated ceiling.

US Congress passed a temporary two week stopgap-spending bill, giving both parties more time to agree on new spending levels for the 2018 fiscal year hoping an agreement can be reached before Christmas, according to the Research Center.

Eurozone's performance is similar to that seen in the US, especially with recent data indicating growth picking up pace.

Purchasing Managers' Index (PMI) rose to 57.5, showing solid activity across the eurozone, added the report.

The data pointed also that fourth quarter of 2017 showed increased growth of GDP, while the final revision to third quarter of same year confirmed growth at a robust 2.6 percent on a yearly basis.

"Consumer confidence for the area also beat expectations, increasing to a post-Great Recession high after its fourth consecutive monthly increase" report stated.

After several EU members succeeded in overcoming the wave of anti-EU challengers earlier in 2017, German national elections weakened Chancellor Angela Merkel, the longest serving EU leader.

A government is yet to be formed, however initial uncertainty faded after the Social Democrats agreed to talks to form another coalition with Merkel’s party.

Brexit-related uncertainty also receded as the UK reached an agreement with the EU over Brexit divorce terms, paving the way for negotiations on the trade relationship.

UK agreed to pay €40-60 billion to settle existing commitments to the block. The deal also included a settlement on the rights of EU citizens in the UK post Brexit as well as the issue of the Irish border.

Both sides will begin the more important part of the talks, which is the trade relationship immediately after Brexit.

In Japan, Shinzo Abe's election victory appears to have coincided with an improving economy, which seems to be seeing its best performance in years, with GDP recording the longest growth streak in decades.

GDP was increased in 2017's third quarter to an annualized 2.5 percent, however, the question remains whether this pace can be sustained in 2018.

In the US, core Consumer Price Index (CPI) inflation stood at 1.8 percent but did not appear to be gaining momentum, adding that this was confirmed once again in November’s wage growth, which despite a tight labor market was not gaining pace. The story was similar in the Eurozone with inflation reaching 0.9 percent in November.

Everyone expected the US Federal Reserve to increase its policy rate by another 25 basis points in December, which they did, especially given the solid economic data and assurances markets received.

Markets expect the Fed to increase the rate 2 or 3 times.

However, things could be more complicated in the eurozone given the structural limitations of QE there, especially that Europe's Central Bank has little credibility continuing with that program past 2018.

Oil prices climbed for the fifth consecutive month in November, and remained above $60, after recent OPEC agreement.

Brent rose to $63 per barrel in November, up 32 percent from where it was six months ago.

The recent agreement, to extend production cuts, reached between OPEC and some non-OPEC provided additional support to prices, though US production growth from Shale oil will continue to weigh on prices in the medium term, the center concluded.

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