In its January 2018 “Global Economic Prospects” publication, the World Bank offered some encouraging economic news: The global economy is expected to return to its long-term potential for the first time in a decade. Last year, the pace of world growth was its fastest since 2011, and projections are for 2018 –19 to proceed along similar lines. International trade volume, which typically reflects the state of the world economy, also grew at its fastest pace since 2011, and economists expect this trade flow to continue in 2018. This is not only positive news for many countries around the globe, it’s also good news for the U.S. economy. One factor contributing to the current strength of the American economy is that our growth is buoyed by growth throughout much of the world. In his recent Congressional testimony, Jerome Powell, the new Federal Reserve Chairman, noted that stronger global growth has “provided considerable support to our manufacturing industry … and foreign demand for U.S. exports is on a firmer trajectory.”
The subtitle of this World Bank publication, “Broad- Based Upturn, but for How Long?” suggests a subtler story. The authors first emphasized that this global economic rebound, while very long in coming, is broad based, with all major regions of the world experiencing economic growth. In fact, relatively few countries are forecast to experience negative growth rates in 2018, and a World Bank researcher forecast that this increased global growth is expected to be sustained at least over the next couple of years.
Vital to any global economic forecast is the health of the Chinese economy. While China’s growth rate has trended down for a few years, economists have noted that the country’s growth rate appears to have stabilized in recent quarters. The World Bank projects that China’s economic growth will slow slightly in 2018, to 6.4% from an estimated 6.8% last year. Most economists also anticipate that the U.S. and European economies will continue to grow in 2018 –19, and Japan will again grow—albeit at a slow rate. Emerging-market economies are forecast to continue growing, as their economies have been supported by higher commodity prices and strong demand from developed economies.
Notwithstanding the above strengths, the world’s economic prospects face both short-term and long-term risks. With continuing economic growth, in the next couple of years central banks will likely continue to adjust monetary policy to normalize (raise) interest rates. While this suggests the possibility of some financial stress, experts express confidence that the U.S. Federal Reserve will continue to increase interest rates cautiously in order to prevent an acceleration of inflation.
In terms of downside risks to long-term economic growth, economists continue to stress the importance of improving human capital through education, strengthening physical capital investment, and stimulating research and development into new technologies. With free and open markets and adequately protected property rights, the environment can be flexible enough to stimulate innovation. This is key to increasing labor productivity, a crucial ingredient for sustainable economic growth.