For the first time since 2010, the world economy is outperforming most predictions, and we expect this strength to continue, Goldman Sachs has stated.
Gobal Gross Domestic Product (GDP) forecast for 2018 is 4.0 per cent up from 3.7 per cent in 2017 and meaningfully above consensus, the agency notes.
According to the Agency, the strength in global growth is broad-based across most advanced and emerging economies.
However, on the supply side, tbe agency noted in its report th “we have also seen tentative signs of a rebound in productivity growth from its dismal post-crisis trend. Nevertheless, spare capacity is diminishing rapidly—and already exhausted in a number of advanced economies, including the US.
“There, the question is no longer whether output will overshoot potential, but by how much. By contrast, Southern Europe needs several more years’ strong growth to return to full employment. If the output gap has largely closed, why is core inflation still so low?
“Our analysis suggests that a good part of the answer lies in a sizable and relatively long-lasting drag from the earlier weakness in import and commodity prices, which has offset the relatively small (though statistically highly significant) impact of diminishing slack so far.
The report further noted that “over the next year, these pass-through effects are likely to diminish and we expect a gradual increase in global core inflation, albeit to levels that are still below central bank targets in most places. If inflation does move up, the strength in activity will soon feel like “too much of a good thing” for some central banks, which need to slow growth to a trend rate to prevent a bigger overheating—and bigger recession risks down the road.”
By contrast, it added that ECB and BoJ call remains modestly dovish to the market. For now, faster Fed tightening is unlikely to weigh significantly on DM growth, wthroughvergent monetary policies typically have limited net financial spillovers.
AccordinglForwhile the impact on emerging economies could be more significant, Goldman Sachs insists that recent structural adjustments have left EM economies more resilient than in past Fed tightening cycles.
“The bigger near-term risks to the outlook are likely political, ranging from the future of NAFTA through the Italian election to the risk of military conflict on the Korean peninsula,” the report said.
