Global economic growth to reach fastest rate in seven years while UK economy expected to slump, says PwC forecast

Global economic growth will pick up to its fastest rate in seven years in 2018, while the UK’s economy slumps to its weakest expansion since the last recession, according to the latest forecast from PwC.

The accountancy and professional services firm’s forecasts are for global growth to hit 3.7 per cent in purchasing power parity (PPP) terms next year, the most rapid expansion, by this metric, since 2011.

PwC said that, for the first time since 2010, it is revising its global growth forecast upwards, bolstered by a robust cyclical recovery in the eurozone and stronger growth in the US.

 

But PwC expects Brexit related-uncertainty to leave the UK on the growth sidelines next year, with a GDP expansion here of just 1.4 per cent pencilled in for next year.

That would be the weakest output in a calendar year since 2009, when the economy contracted by 4.2 per cent.

“We expect global economic growth to be broadly based in 2018, rather than dependent on a few star performers,” said Barret Kupelian, senior economist at PwC.

“While the growth outlook for 2018 is positive, there are some downside risks for business to bear in mind, including the progress of the Brexit negotiations and wider discussions about the future of the EU.”

PwC’s pessimistic 2018 GDP forecast for the UK is in line with the most recent projection from the Treasury’s official forecaster, the Office for Budget Responsibility.

In 2017, the UK’s GDP growth is expected to be 1.5 per cent, itself the weakest since 2012.

Activity has been dragged down by a spike in inflation since the June 2016 Brexit vote, induced by the record slump in sterling on the night of the referendum.

That has crimped household spending. Investment has also been frozen by many firms, attributable to uncertainty about trade relations with Europe after Brexit in March 2019.

PwC said that 2018 could see the European Central Bank halt its money-printing programme altogether, rather than just tapering it down, if inflation in the single currency area comes in a little stronger.

Five things to look out for as US interest rates rise this week

This will be a week where interest rates and currencies will climb to the front, though politics retains the capacity to surprise us all.

For a start there will be another rise in US interest rates after the Federal Reserve meeting on Tuesday and Wednesday. This will be the first rate-setting meeting chaired by Jerome Powell, so inevitably there will be a focus on what he says about it.

Do not expect any comment on the current administration’s policies, for that would be improper and unwise. But do look for a signal as to whether the Fed is likely to stick to the present expected path of three more rate increases this year. Anything about the strength of the US economy is always important. But most telling of all will be the reaction of the markets.

There are several things to look for here, and not just in America. There is a lot debt around in the world and a gradual return to normal monetary policy means a gradual return not just to higher central bank rates but also to higher long-term rates.

Which countries, which banks and which segments of the market are most vulnerable? For example, should we be more concerned about high-yield bonds, issued typically by higher-risk borrowers? Or should we focus more on sovereign debt? (Will Russia still be able to borrow on the international markets on favourable terms, and if so what does that say about the morality of money?) Or housing debt – though here the UK looks less exposed than some other markets?

There will also be implications for the UK. The Bank of England’s monetary policy committee meets on Thursday and the thing that everyone will be looking for is an indication of whether the next rise in UK rates will be in May, as expected. As well as the implications for the UK housing market, there will also those for the pound.

But the pound’s value is not just about interest rates, for there will also be a key round of Brexit talks, and the question there is simply, is a transition deal in place? If so, expect the pound to strengthen; if not, expect a lurch downwards.

Finally we have a new governor of the People’s Bank of China. The present governor, Zhou Xiaochuan, has been in post for 15 years. His successor is reported to be the deputy governor, Li Gang. If this is confirmed, there will be a general feeling of comfort around the world.

Chinese monetary policy has been managed as skilfully as possible within the wider constraints of the Chinese political system, and the expectation therefore is that this reasonable competence will continue. This year China passes the eurozone to become the world’s second-largest monetary area, with the effect that Chinese capital flows have global impact. There is widely publicised concern over the indebtedness of large swathes of the economy. How that is handled affects us all.

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Global economy shows strong growth but countries must prepare for change, says IMF chief

International Monetary Fund managing director Christine Lagarde said on Tuesday the global economy was showing broad-based growth, but the landscape was shifting with heightened risks of trade disputes, monetary policy normalisation and technological change.

Ms Lagarde, speaking to an IMF conference in Jakarta in preparation for the Fund’s annual meetings in Bali in October, said the IMF was expecting global growth to reach 3.9 per cent in 2018 and 2019. This is unchanged from the IMF’s forecast in January and up from 3.7 per cent in 2017.

She said ASEAN countries were preparing for higher interest rates in advanced economies such as the United States and Europe, but cautioned that policymakers need to stay vigilant about its effect on financial stability and volatile capital flows.

“We know this will have spillover effects across the world. We have known for some time that it’s coming,” Ms Lagarde said. “It remains uncertain how this transition is going to affect other countries, companies, jobs, incomes.”

ASEAN countries need to embrace new growth models that put a greater emphasis on domestic demand, regional trade and economic diversification and prepare for technological changes such as increased factory automation, artificial intelligence, biotechnology, new financial technologies and digital currencies.

While these could eliminate some jobs, it was important for countries to boost efforts to educate workers to better prepare them to take advantage of new technologies.

“Many jobs will be affected one way or another. Some of them will disappear, but many more will be affected because of automation. So we need to think about the future of work,” Ms Lagarde said, adding that there was no single approach, and many countries will forge their own path.

She highlighted Go-Jek, the fast-growing motorcycle hailing and delivery service in Indonesia as an example of a country-specific technology innovation targeted to the country’s needs and workforce.

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Alexandria Ocasio-Cortez has kick-started the Democratic tax debate with her 70% marginal rate idea

  • Alexandria Ocasio-Cortez, the young firebrand who just took her House seat to represent the Bronx, has sparked headlines by suggesting tax rates as high as 70 percent to finance a “Green New Deal.”
  • With little prospect of success under President Trump, the new House Democratic majority has avoided the issue in its initial legislative agenda.
  • But the party’s gathering field of 2020 presidential candidates won’t have that luxury.

The tax furor triggered by Rep. Alexandria Ocasio-Cortez has opened debate on a core question for all Democrats: Where should government get more money?

Virtually none doubt the need for new revenue. Aside from new programs the party favors, the federal budget deficit is already projected to top $1 trillion in 2019 and keep rising for years.

Ocasio-Cortez, the 29-year-old Democratic firebrand who just took her seat to represent the Bronx in the House, has sparked headlines by suggesting rates as high as 70 percent to finance a “Green New Deal.” That drew swift derision from House GOP Whip Steve Scalise, who summarized it as “Take away 70 percent of your income and give it to leftist fantasy programs.”

In fact, Ocasio-Cortez didn’t propose taking 70 percent of anyone’s income. She suggested applying the rate only to earnings beyond $10 million, meaning those affected would pay a much lower share of their income overall.

The top tax rate stood above 90 percent throughout the 1950s. But through deductions and tax avoidance, “taxes on the rich were not that much higher” then, the conservative Tax Foundation noted in a 2017 article.

The top rate remained 70 percent as late as 1981, the first year of Ronald Reagan’s presidency. The most affluent 1 percent paid a far lower average rate of 30.5 percent, however, according to a Tax Policy Center analysis. By 1989, when Reagan left office, the top rate had been slashed to 28 percent but their average rate dropped only slightly to 27.9 percent.