2017 was a wild year. The inauguration of Donald Trump, the Brexit impasse and negotiations, possible far-right populist victories in European elections, the threat of nuclear war in East Asia, separatist movements within the EU, the meteoric rise of cryptocurrencies and blockchain tech. Not all the fears came to pass, and not all the hoped-for events occurred. Then again, for many of these events, the hoped-for outcome depends heavily on your perspective.
One of the most important issues in almost any political or social situation is the economy. So, how will the economy fare in 2018? Will the long-standing bull market continue, or will the recovery collapse, throwing the world into another recession? We’ve culled the opinions of some of the most respected institutions (and some internet whispers) to see what 2018 will bring. Predicting the future is notoriously difficult to do, but that won’t stop anyone from trying.
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The general consensus on the economy: a positive outlook. With opinions from bulge bracket banks and respected institutions, it seems 2018 is poised to witness the continued recovery of the global economy.
Big Banks: According to several bank reports (linked below), it seems global growth will average in around 3.5-5%, depending on whom you ask. The Bloomberg consensus is 3.6%, while Goldman Sachs explicitly stated they were “above the estimate” purposefully. In developed countries, there is a talk of 1-3% growth, with the developing world barreling ahead at up to 8%, as usual. The consensus for overall growth is 2.1% for the former and 4.9% for the latter. Most estimates expect China to grow in the 6.5-7.5% region. A slowdown from the breakneck pace of the past, but nonetheless substantial for an economy with the weight of China’s. The Bloomberg Consensus put India at 7.4%, with Russia and Brazil continuing to rebound, albeit with less force as India and China.
Our Own Digest: One interesting last-minute development was the Republican Tax Reform in the United States. Many bank reports cited the bill’s passing into law as a possible driver for even higher growth. Well, maybe as a Christmas gift to the economy, the Republicans passed the law and President Trump signed it just before Christmas. Perhaps tellingly, many reports expected the law to be passed sometime next year, and they even had some probabilities that it would pass – indicating it wasn’t a certainty. Now, the probability is 1, because it already passed.
Whether attributable to the gig economy or not, unemployment has been headed towards historic lows in many countries (though some laggards in the Eurozone still have high unemployment, with Italy and Spain main concerns). The tight labour market in the US and a solid recovery underway in the country will drive the Fed to shrink its balance sheet, signalling the beginning of the end of the QE era. There’s also a high probability the Fed will raise rates, as it did so thrice in 2017. Many banks are predicting another year with three interest rate increases in 2018, with GS predicting above-the-consensus again, at 4 times. And while the ECB won’t be shrinking its balance sheet, it will slow its purchases in order to taper off its QE strategy. The Bank of Japan is expected to keep its current trajectory, as inflation remains far below the target.
China’s Debt (and Politics)
Big Banks: While Chinese corporate debt is high, it doesn’t seem to be a warning sign. China’s slowdown is expected to be orderly, not a crash-and-burn scenario. Assuming a steady tightening of credit in the world’s second-largest economy, it seems the slowdown can be handled without killing the global recovery or its own national economy.
Our Own Digest: Moreover, Xi Jinping was reselected as the Communist Party’s leader in China. It is now believed that Xi’s power is comparable to that of Mao Zedong, meaning he is largely supported by the established government and is expected to remain in power for the foreseeable future. This means stability for the future in China, and only unexpected shifts in global affairs will derail Chinese policy. China’s newfound interest in pollution control and sustainable energy could mean a greener year for green tech.
The year seems like a good one for equities. Projections for the S&P500 are not uniform, though. Goldman, Deutsche, and BofA are forecasting the 2800-2900 range, but Wells Fargo predicts something around 2500. Credit Suisse predicts above 5% growth for all major markets: the UK at 5.4%, the US at 7.1%, and Japanese and Swiss equities with a hefty 10% increase.
Europe’s rejection of far-right movements, especially in central-axis France, has allowed investors to breathe easy and expect decent returns on European equities. The MSCI EMU (Economic and Monetary Union) expects over 8% growth for Europe.
As long as there are no inflation surprises, it seems equities will fare well. If central banks are suddenly required to beat back inflation, causing them to raise interest rates suddenly, there could be some movement into the stability of bonds. But for now, it seems equities are the place to be. However, valuations need to be taken into consideration, as State Street points out that some tech stocks in the US are already overvalued (after a nine-year bull run and the US being in the later stages of recovery).
The Millennial Demographic Trend
Credit Suisse’s report has an interesting section on Millennials. Millennials are coming into their own as a driving force in the United States. They are now the “largest living generation”, and this will affect US policy going forward. This is important for several economic trends: sustainability, in energy and otherwise, will be hot topics. Environmentalism and more liberal policies will come to be more favoured in the coming years and decades in the United States. Convenience technology and the Internet of Things will benefit, but industries like traditional retail and transportation will suffer.
Pew Research has also researched Millennial trends. A different story is emerging in Europe. As the population ages in Europe, millennials as a percentage of the adult population is low. According to Pew Research, millennials account for only 19% of the adult population in Italy. If immigration doesn’t solve Europe’s labour woes, perhaps automation will.
The economic outlook among American and European millennials is sobering. Less than 40% of millennials across Europe and America see a better financial future for the next generation. In the US, Germany, and Britain, it was around 37%. In France? Just 15%. Though demographics are influential on longer timescales than one year, elections happen much more often, and not only will the buying power of millennials demand more clout, their voting power will also increase, affecting economic and social policies going forward. The 2018 midterm elections in the United States, with considerable millennial resistance to Trumpist and Republican policies, will likely affect the economic stance of America and, in turn, the rest of the world.
Some Controversial Predictions
Most of the banks are in consensus about the future. But what about some of the disruptive technologies, radical ideologies, and plain old geopolitical policies? Below are a few predictions we’ve found floating around the internet or even our own thoughts.
China Introduces Renminbi-Based Oil Contracts
The United States has historically been averse to relying on foreign nations for its oil, but until recently, it was a necessity. China’s expanding economy has catapulted the country to the forefront of oil consumers, directly behind the US. With these two trends, China became the world’s largest oil importer in the first half of 2017. The status of the renminbi, while not a traditional reserve currency, is likely to become increasingly important in world trade. And while China is no angel, the US’s policies in oil-rich nations may drive those nations to transact with China in yuan, not dollars, simply to spite the United States. The death of the petrodollar and the birth of the petro-yuan, at least for some regions, could occur in 2018.
Everyone above happily assumes inflation will remain low and the drying up of liquidity in the US and Europe will have little effect on equities. In fact, they’re all bullish on equities for 2018. But what if a shock blows the whole thing up? Saxo Group stated a 25% drop could happen (in their yearly “Outrageous Predictions” publication). Due to the double issue of expensive equity and expensive fixed income, plus the expectation that 2018 will be a stable year, a systemic shock could send stocks plunging. Algotrading probably won’t help.
Cryptocurrency Explosion and Implosion (CityFALCON’s own predictions here)
We’ve talked a lot about cryptos on CityFALCON here. The technological potential of blockchain is enormous. But Bitcoin was the first in a series of cryptocurrencies that will see improved protocols, pushing out the earlier generations. As of this writing, Bitcoin, Ethereum, Ripple – these are some of the largest cryptos, and they have seen spectacular returns over the year. Of course, their volatility is just as notorious as their rise. One day in late December, Bitcoin and others plunged over 30% against the USD, just to pop back up from their lows. It’s a normal day in crypto trading.
But with the push for regulation on the markets, it seems Bitcoin futures are a new concept for traditional financial institutions to play with. Can government keep up with the rapidly evolving technology? Governments tend to have a poor record of keeping pace with technological change, so probably not. Furthermore, countries like Russia and China do not particularly appreciate the capital flight vectors associated with decentralized digitalized currencies. Cryptos require networks to exist, and tightly controlled networks (such as the Great Firewall) could effectively destroy Bitcoin prices.
2018 is very likely to see more regulation surrounding cryptocurrencies because they show significant promise to take monetary and economic power out of the hands of central banks and put it into the hands of the people – a very controversial issue, indeed.
Climate change is such an imposing and problematic issue that countries are unanimously moving to slow its impact. Even in the United States, where Trump pulled the country out of the Paris Accords, several (mostly liberal) cities and states have considered legislation to adhere to Paris Accords guidelines, regardless of the federal stance.
Climate and weather-related natural disasters may intensify, but more worryingly are sudden-strike disasters. If a hurricane is like an incoming asteroid, an earthquake or volcanic explosion is like an incoming gamma-ray burst: completely unpredictable and widely destructive. High bond and equity valuations, plus tightening of QE and low volatility, have made the world complacent. A sudden massive earthquake and ensuing tsunami in Asia or an awe-inspiring volcanic explosion could topple the delicate balancing act of central banks and economies. A massive volcano spewing rock and ash into the atmosphere could cause food shortages and destabilize entire regions, while major earthquakes could disrupt economic hotspots like Tokyo or Silicon Valley.
The above predictions were a wrapper for all of the financial institutions’ opinion. It is a top-level overview and mixes all the bank reports together to form a coherent consensus view. But each bank has its own merits and demerits, and each one uses its own methods for predictions. Therefore, we also have collated the important points from each report to give you broker-specific summaries.
Cyclical upswing. The United States recovery is mature, but it’s unlikely to falter. They say Europe is in a “Renaissance”, and expect the recovery to spread throughout the Union, while the UK’s position is largely contingent on Brexit negotiations. Japan is looking up and China is “resilient” and now “more balanced” (i..e, it isn’t overheating). EMs are more insulated now than before 2008. The Fed will raise rates twice in 2018; the ECB will taper its purchases from €60B/month in 2017 to €30B/month in 2018 (until September); the BoE will avoid tightening while the BoJ will continue its current trajectory; the PBoC will also continue its current policies.
See Amundi’s full report here.
Citibank is focused on an international investment strategy, touting its higher return and lower volatility over the 1952-2016 period (a14). Between the Fed and ECB, investors will need to purchase $850B sovereign debt and other high-grade securities to offset reduced central bank involvement, possibly tempering the appetite for riskier equity. Investors should remain wary of populist movements.
The Chinese situation looks good, with slight tightening and leeway for change. They prefer equities to bonds in Europe, and the ECB will keep rates low while also reducing asset purchases. The US recovery will continue, bolstered by tax cuts and hurricane relief spending, and the Fed will raise rates thrice in 2018. They see EM equity and fixed income growth, as they’re cheap in comparison to DM counterparts, and the currencies to buy them are cheap. They expect the return of volatility in 2018. They’re wary of cryptocurrencies, citing Betamax and MySpace as examples of initial success but eventual failure.
See Citibank’s full report here.
Their subtitle for the report is “Next Generation’s Footsteps”, and CS is focused on the Millennial demographic trend. CS predicts sustained economic growth, but lower equity growth than 2017. Central Banks will tighten policies in the US and Europe, possibly causing volatility in some currencies and equities. They see three rate hikes for the Fed in 2018. M&A activity will also rise in 2018. They are, like many others, not worried about the long upswing in the US economy, though it could lead to overheating by the end of 2018. China will pursue stability, while growth in Europe will be robust, with growth reaching every nation in the Union. As for EM, upward momentum will offset fewer dollars (from the Fed’s pullback).
Their section on Millennials cites a “top ten” (page 35) of Millennial interests and their possible economic impacts. CS states active management is essential, as a simply broad-based investment is not expected to produce returns as good as in 2017. Page 55 details their “ five super trends”, including generational pressures, technology, and defence.
See Credit Suisse’s full report here.
DB expects global GDP growth to be about 3.8%, with German growth at least 1.8%. Their 2018 DAX target is 14,100 points. They worry about inflation getting away from central banks, forcing a rushed tightening policy that hurts growth. They do, however, place their trust in the central banks to move prudently. The ECB will start hiking rates in 2019, assuming no slowdown in the Eurozone (which they don’t expect). The US is on strong footing and will continue to expand in 2018. They don’t see much upside potential in bonds, but equities will fare well. Japan is hitting multi-decade highs, with China’s market liberalization a potent avenue for Chinese money ending up in foreign projects.
As for future trends, Deutsche suggests avoiding cryptos, but other digital trends, like Big Data and the Internet of Things, are ripe for long-term returns. They also expect more volatility next year, citing geopolitical issues as likely drivers.
See Deutsche Bank’s full report here.
GS expects the world economy to continue to outperform industry forecasts, and therefore predicts 4.0% growth rather than the consensus 3.6%. The output gap is finally closing, and they expect potential to fall behind output. They’re more hawkish on the Fed and other G10 economies, but dovish for the ECB and BoJ – in comparison to other financial institutions. US tax reform will only modestly affect US growth, though, with only about 0.2 percentage points coming from the reform.
Russia and Brazil will continue to improve, India will charge ahead, and China’s will take care to limit the externalities of previous growth (environmental concerns and credit issues). Productivity in the DM is improving. In relation to the output gap, they see the US, UK, and Germany as already past full employment, with Japan rapidly closing the gap and a few laggards in the southern Eurozone. Policy shocks at home are unlikely to affect the other DM economies, and EMs are better positioned to weather the effects. The biggest risks to growth are again political for GS.
See Goldman Sach’s full report here.
Schroders advocates an active strategy to investment because passive investing relies too much on the momentum provided by years of liquidity (from QE policies). Looking at previous data, it seems inflation drives value investing returns, and they are not confident that inflation will remain low, in opposition to most other banks. Furthermore, the high bond and equity valuations are cause for concern, as the Sharpe ratio on the SP500 is 4.5, well above the high of 3.0 between 1928 and 2016. Therefore, active management and value investment are their recommendations.
See Schroders’ full report here.
SS prefers equity over bonds, but they acknowledge the high valuation rates. Their subtitle for this year’s report is “Step Forward, Look Both Ways”, indicating a cautious growth and a need to remain vigilant. Russia and Brazil have solidly moved into recovery territory, and China’s slowdown will be an orderly event. Trade and productivity will be up across the world, but inflation will remain low. The avoidance of political issues in Europe means solid, albeit low, growth for the Eurozone. Brexit still has a lot of downside risk, though at this point, the labour market and economy are steady for now.
See State Street’s full report here.
The investment picture is to remain in equities, with continued growth expected. Active management is important, and China’s debt problem is overstated – therefore, China offers significant opportunity for returns.
WF states upfront that the US economic cycle is in its final 3rd, while international growth is in its 1st leg. US inflation will remain low, with slightly higher inflation in Europe and Asia. Growth in earnings will drive growth in equities, both in the US and abroad. Due to strong demand for fixed income, interest rates likely won’t rise materially.WF expects the Fed to hike rates twice in 2018, simultaneously shrinking the balance sheet.
On commodities, WF predicts $40-$50 West Texas Intermediate oil, with gold falling to $1150-$1250 by the end of the year. It also looks like a good year for active management, especially considering the divergence of central bank policies.
See Well Fargo’s full report here.
Lazard is more positive than last year, with an expectation that the US recovery will last another 3 to 5 years, where a middle class consumer recovery will drive the overall recovery. This consumer-led recovery is built upon higher wages and housing prices. The Fed will raise rates two or three times to 1.75-2.00% by the end of the year. Europe’s recovery is domestically-driven, and as such will continue next year, and the ECB will keep expanding its balance sheet, albeit at half the rate (€60B to €30B a month).
The main concern in China is leverage-based growth, and Lazard expects a sustainable target of 3%-4% growth (though 2018 will again be higher), with leadership focusing on environmentalism, higher quality growth, and social prosperity. An interesting concern is the increased difficulty of managing a “two-staged” economy, where coastal economies are largely focused on service and interior areas are focused on industry. Japan will grow at about 1%, despite an aging population, supported by stronger exports. However, Lazard warns Japan is not as export-dependent as many believe (only 15% of the GDP derives from exports).
See Lazard’s full report here.
Nomura’s latest press release for 2018 is trained on corporate earnings within its Nomura Equity Indices, which are comprised of Japanese companies. They see sales growth driving earnings growth, based on stronger macroeconomic factors across the globe. Such earnings growth will be less impressive than 2017, due to the recovery calming down.
Steel and trading companies will see a slowdown in recurring profits. Overall, the chemical, electrical machinery & precision equipment, and machinery sectors have received the largest upward revisions. Specifically, automation, born out of efficiency and environmental initiatives in China and Europe, will benefit electronics parts manufacturers significantly. Media will negatively contribute to profit (i.e., incur losses).
See Nomura’s full report here.
Bank of America
BofA thinks next year will be the “year of euphoria”. Global growth accelerates, but the bull market is coming to the end of its run. The tightening of the labor market in the US will lead to inflation, and credit will also become a bit scarcer. Sentiment is more influential on SP500 movements than fundamentals, and the biggest upswing will occur in the first half of the year. The top of the forecast is 2863 for the SP500 and 8000 for Nasdaq before a large correction (and ending the year at 2800 for former). True to a euphoria outlook, some of the greatest gains come at the end of the bull market.
Tax cuts of $1.5T in the US are forecast to add 0.3pp to GDP growth in 2018 and 2019. Tax Reform could lead to a divergence of US and UK monetary policy, as the Fed normalizes but the BoE must remain cautious on Brexit. Brent Crude will reach $70, LNG will rise, and gold is forecast at $1,326. A stronger dollar will weigh on upside potential, though. Equity will outperform bonds, volatility will increase, and tech equity will continue upward, even as it exhibits “lofty valuations and bubble-like behavior”.
See BofA’s full report here.
GDP Growth 2018 (%)
Sources, and Further Reading
We mostly used the official bank publications for our research, but we did have a couple website articles. Here are our articles:
And here are the links to the Bank Reports we read through for this article:
Bank of America (not a PDF report, but a press release)
Deutsche (also a simple press release)
At CityFALCON, we support investors and traders in getting most relevant news stories and tweets for their portfolio and watch list. Try it out here.