The global growth continued to strengthen and rose in the second half of 2017, driven by strong investment and trade developments across the nations. The growth momentum is broad-based with strengthened activities in most of the countries over the last year including stronger-than-expected outcomes in the euro region, Japan and United States, continued fast expansion in China and improving conditions for commodity exporters.
International Monetary Fund’s in its report “Global Prospects and Policy Challenges” notes that financial conditions remain supportive despite the recent equity market turmoil in the world. A strong rebound in investment and international trade is supporting the global expansion led by advanced economies. The picture in emerging economies is more mixed, with higher commodity prices sustaining the recovery in commodity exporting countries. Also, Euro area growth has been the highest in a decade and strong global trade boosted activity in Asia, with China benefitting from continuing fiscal and credit stimulus.
While headline inflation is being pushed up by oil prices, it remains below target in many G-20 countries. In the United States, which is now close to full employment, signs of rising inflation and wage pressures are being watched closely by policymakers and financial markets alike.
In line with the strengthening cycle, policy rates among advanced economies are beginning to normalize, with a sequence of cautious interest rate hikes in the United States and in other countries. The Fed is also gradually reducing the size of its balance sheet and the European Central Bank has started to taper its large-scale asset purchases. Long-term market interest rates increased notably—driven by concerns about inflation—and there was a spike in equity market volatility, but broad financial conditions are still supportive by historical standards.
Going ahead, growth is set to slow, however, as the global cycle matures further one important factor will be the gradual tightening of financial conditions under the baseline. As inflation is expected to rise due to reduction in residual slack of higher growth including lowering unemployment where it is still elevated and reducing involuntary part-time work—monetary policy will gradually normalize, leading long-term interest rates higher. At the same time, there will be an end of some of the temporary fiscal support behind current growth.