Five things that indicate whether economic growth will continue in 2018

Don’t listen to the background noise about a trade war between the US and China or possible conflict with Iran, the real devil is in the detail

Hamish McRae
Sunday 13 May 2018 16:14
Germany matters more as a signal of global demand because it is the world’s third largest exporter
Germany matters more as a signal of global demand because it is the world’s third largest exporter

It will be a week when the news will be dominated by big, global and political forces, but our future prosperity and wellbeing will be determined more by the modest progress of the major economies.

So we will get more noise on Iran, the trade tussle between China and the US, and on Italy’s new government – and I suppose on the Brexit negotiations. But these will not tell us whether economic growth will be sustained through the second half of the year, and after a wobbly first quarter that matters quite a lot. So what should we look for?

Being based in London I’m interested in the UK, though from a global perspective it is not that significant. But we do have the monthly labour market statistics on Tuesday, and these will help us understand whether the dismal first quarter was a blip or something worse. Do not expect anything dramatic. Unemployment will remain at or close to its 43-year low of 4.2 per cent. That is a pretty stunning achievement, and one that in my book does not get sufficient acclaim. But the really interesting thing is whether it could go much lower, perhaps back to the 3 per cent level that William Beveridge defined as full employment in his 1942 report but which in the 1950s, when unemployment was around 2 per cent, seemed to be too high.

Germany matters more as a signal of global demand because it is the world’s third largest exporter. We also get first-quarter GDP figures on Tuesday. Anything above 0.3 per cent growth for the quarter will be encouraging, and anything below that the reverse.

The oil market always gives a feeling for demand, though at the moment it is being distorted by fears about Iranian exports. Last week, Bank of America said that oil could go to $100 a barrel next year, but that won’t happen if the current slowdown persists. The world is able to cope with a reasonable uplift in the oil price, arguably better able than it was five or 10 years ago. So I think it is better to see the oil price as a signal of sentiment (and of course demand) rather than a determinant of growth.

The US economy always matters, and there are industrial production numbers on Wednesday. My guess (and that of the equity market) is that both overall demand and wage growth will be sustained this year and that there will be four increases in interest rates. It is hard to see quite what will stop the US economy right now, given the tax boost. Something will, but not yet.

Finally, I am intrigued by the weakness in emerging market assets. We focus so much attention on the developed world that we tend to forget that more than half the incremental growth in the world comes from developing countries. Of course, what is happening in Turkey and Argentina undermines confidence in the sector as an investment, but there should not really be as much fear as there seems to be. Emerging market equities have been very soft. What usually happens is that global swings are more pronounced in emerging economies than they are in developed ones, so they are in a sense the canary in the mine. But present weakness seems to be more about sentiment than any systemic risk. Let’s hope it stays that way.

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