Monetary Policy Tightening To Determine Global Economy in 2018

The world’s 2018 economic outlook will be anchored on three themes according to a report released by Cytonn Investments Limited.

In 2018, the following three themes will determine the outcome economically:

Monetary Policy tightening

The US Fed is expected to continue on the path towards tightening of monetary policy, with the expectation of three further rate hikes in 2018, coupled with an unwinding of its quantitative easing program.

The European Central Bank reduced its quantitative easing program pace, by reducing its monthly bond-buying program to EUR 30.0 billion from EUR 60.0 billion from January 2018, with the option to either end or extend the stimulus package beyond September 2018.

These accommodative policies have been used to support the economic recovery since the 2008 global financial crisis, and the reversed stance to gradually remove them by Central Banks highlights the stronger growth in their specific regions and the global economy.

Global trade remains robust

The World Trade Organization (WTO) upgraded their outlook for world trade growth in 2017 to 3.6 percent from their 2.4 percent expectation in April 2017 citing resurgence in Asian trade flows as intra-regional shipments picked up, and as import demand in North America recovered after stalling in 2016.

Trade growth is expected to remain robust in 2018, albeit less so than in 2017 as per WTO, with trade growth expected to slow to 3.2 percent in 2018 from 3.6 percent in 2017, due to:

• Higher base effect from a thriving 2017, compared to a weak year in 2016
• Heightened monetary policy in the US and Eurozone, as the Fed gradually raises rates and the European Commercial Bank (ECB) slowly phases out its quantitative easing program
• Controlled fiscal expansion in China, to prevent the economy from overheating, whereby the productive capacity of an economy is unable to keep pace with growing aggregate demand.

Stable Commodity Price

Global commodity prices have registered gains in 2017, with crude oil, metals and minerals, and energy registering gains of 15.7, 13.5, and 11.5 percent respectively despite agriculture experiencing a decline of 2.1 percent as per the World Bank Commodity Prices Index.

According to the World Bank, oil prices are forecasted to rise to an average of USD 56.0 a barrel in 2018 from USD 53.0 a barrel in 2017 as a result of steadily growing demand and a sustained cap on oil production by OPEC countries and Russia, despite increased US shale oil output.