Executive Summary
A. GLOBAL ENVIRONMENT
- Global growth continues rising. The global growth outlook remains positive. The sustained improvement in global trade and manufacturing reinforces the strength of domestic demand in advanced economies. Confidence indicators continued improving, buoyed by unrelenting rallying in global equity markets and the confirmation of historic tax reforms in the US as well as tentative positive progress of the UK Brexit negotiations. The International Monetary Fund (IMF) estimated global growth to increase by 3.7% in 2018 (3.6% in 2017).
- Advanced economies going steady. The US economic expansion is increasingly broad based across sectors, powered by a tightening labour market. The economic recovery since the 2007-2009 recession is now in its eighth year and showing little signs of fatigue. Growth in the eurozone continues to expand solidly, albeit mixed between some economies while Japan's economy grew for the seventh straight quarter in 3Q17, its longest expansion since 2001, backed by rising business investment and a recovery in exports. China's economic restructuring growth still steadying though the authorities would continue to rein in credit growth and control debt without hurting the growth.
- Global liquidity conditions will tighten gradually. Going into 2018 and beyond, global financial conditions will tighten further as the Fed continues its forward guidance of measured pace of interest rate hikes and continued shrinking of balance sheet. A gradual reversal of ultra-monetary stimulus is not expected to pose a major drag or shock to asset values.
- Keep a close watch on inflation. Another closely watch indicators are headline and core inflation in advanced economies. They are seemingly looking benign or even falling in some months, and are still not hitting the central banks’ target of annual inflation rate of 2.0%. While the positive supply shocks via technological innovations, low commodity prices and slack capacity had helped to ease inflation pressure, but the inflation will eventually catch up if the output gap narrows and the slack in product and labour markets diminish as the economy strengthens and demand gets stronger.
- Global economic risks in 2018. One potential shock that has received much attention relates to the pace of the Fed’s monetary tightening if the risk of inflation is underestimated in months ahead. Rich asset valuations raise the likelihood of a market correction should there is a policy misstep or a protracted period of policy uncertainty, which could dampen growth and investors’ confidence. And looming in the financial stability risk is a mountain of non-financial debt that makes markets nervous and increases the system’s vulnerability to destabilizing shocks. Other key risks are the on-going Brexit negotiations, inwardlooking policies that hinder global trade and market reforms. Rising geopolitical tensions can also weigh on market confidence and economic growth.
