2017 will likely be recalled as a period of stark contrast, with many economies experiencing growth acceleration, alongside political fragmentation, polarization, and tension internationally. In the long run, it is unlikely that economic performance will be immune to centrifugal political and social forces.
For 2018, Morgan Stanley forecasts U.S. GDP to grow by 2.5 percent, slightly above their 2.3 percent forecast for 2017, and China's GDP to grow by 6.5 percent, below China's 2017 forecast of 6.8 percent. Sheets said emerging markets excluding China are "central to all, and we see EM growth accelerating from 4.7%Y this year to 5.0%Y in 2018, led by Brazil and India."
Year 2018, the big story is likely to be how to manage the continued expansion. A turning point may come at the end of September, when the European Central Bank might stop or curtail monthly bond purchases. The central banks bought bonds to drive down long-term interest rates. Central banks have been more prone to telegraphing their monetary policy decisions to financial-market participants in recent years, especially following the financial crisis.
The one exception is the United Kingdom, which now faces a messy and divisive Brexit process. Elsewhere in Europe, Germany’s severely weakened chancellor, Angela Merkel, is struggling to forge a coalition government. None of this is good for the UK or the rest of Europe, which desperately needs France and Germany to work together to reform the European Union.
In Asia, Chinese President Xi Jinping is in a stronger position than ever, suggesting that effective management of imbalances and more consumption- and innovation-driven growth can be expected. India also appears set to sustain its growth and reform momentum. As these economies grow, so will others throughout the region and beyond. In China, Sheets expects the economy to slow down amid policy uncertainty.
The IMF points out that prospects are “lackluster” in many nations of sub-Saharan Africa, the Middle East, and Latin America. Even in wealthy nations, those at the bottom are hurting. In view of improving economic performance in the developed world, a gradual reversal of aggressively accommodative monetary policy does not appear likely to be a major drag or shock to asset values.
In the U.S., wage growth remains anemic despite an unemployment rate still in the lower level. One reason for optimism about the outlook is that the global expansion seems to be based on strong fundamentals, not froth. However, an potential shock that has received much attention relates to monetary tightening is that policy that has just announced, the $1.5 trillion tax bill will have broad effects on the economy, making deep and lasting cuts to corporate taxes as well as temporarily lowering individual taxes. Moreover, It is unclear at this point whether President Donald Trump’s administration actually intends to retreat from international cooperation, or is merely positioning itself to renegotiate terms that are more favorable to the US.
One concern for the global economy as a whole is that the recovery has been built on too much debt, which companies will be hard-pressed to service when growth inevitably weakens. Even if the global economy does well in 2018, financial markets might not. Prices of stocks and bonds are so high that it wouldn’t take much of a jolt to send investors rushing for the exits. Investors will have to be careful next year as potential stalling economies in the U.S. and China, along with rising global inflation and tighter monetary policy, could make for a "tricky" 2018.