Macro update - December

Global recovery set to continue

A very strong year is coming to an end in the global economy. Corporate profit growth has been robust, business and consumers are the most upbeat in many years and the expansion has had plenty of breadth, with most regions and sectors enjoying rising growth.
Strong support from monetary policy and the first year in many years with no negative shocks hitting the world have paved the way for an acceleration in the global economy. Fears of a US-China trade war or military conflict on the Korean Peninsula have not materialised. The strengthening global activity, notably investments, has raised global trade, which is now growing at the strongest pace since the financial crisis.
As a result, 2017 is set to be the best year for the global economy since 2011 with growth of 3.6% and all regions of the world contributing. We expect global growth to continue at a decent pace in 2018, holding up at 3.6%, with investments in the US and the euro area growing at a decent rate and consumers seeing further support from robust real wage growth, gains in employment and rising housing wealth.
We look for inflation to stay fairly muted in 2018 and central banks to withdraw stimulus only very gradually. Risks to our forecast are fairly balanced, though the uncertainty posed by the Italian election and NAFTA agreements could weigh negatively on the growth outlook. A slowdown in China would also put a small dent in the global business cycle.

World trade growing at the fastest rate since 2011

Source: CPB, Macrobond, Danske Bank

Gradual ECB exit amid robust expansion

With growth accelerating to 2.3% in 2017 according to our projections, we expect another year of solid GDP growth of 2.0% in 2018 in the euro area (up from 1.6% previously), driven primarily by a more favourable outlook on private consumption and investments.
Despite the narrowing output gap and continued employment gains, we expect wage growth in 2018 to stay below average due to significant slack in the labour market. In our view, muted wage growth and euro appreciation will contain underlying inflation pressures in 2018. We expect inflation to pick up in 2019, but stay below target without further lift from energy prices.
We think the ECB will end its QE programme in 2018, before embarking on a gradual hiking cycle, delivering the first 10bp deposit rate hike around six months later in Q2 19. With wage growth and core inflation expected to move gradually higher, the second 10bp deposit rate hike is likely to come another six months later in Q4 19.
Apart from the lingering Catalonia crisis, a stalling government formation process in Germany and the possible collapse of Brexit negotiations, downside risks to the growth outlook still stem primarily from the Italian parliamentary elections in early 2018.

Economic sentiment pointing to more robust economic activity

 
Source: Eurostat, Macrobond, Danske Bank

Inflation in Latvia continues to fluctuate around the 3% mark

After four consecutive years of ultra low inflation, this year price growth in Latvia is much higher and fluctuates around the 3% mark. In October inflation was 2.7% but overall in 2017 it should average 3.0%. Looking into 2018, we expect inflation to remain at a similar level as well and average 2.9%.

The key factor that was pushing down inflation in the previous years was negative growth in the price of energy products. This year the situation has reversed. Energy products are on average 4.2% more expensive compared to a year earlier.

On the other hand, the category which has so far had the biggest impact on inflation is food products, which are on average 4.8% more expensive than in 2016. Among food products with the highest inflation are milk products (+12.0%) and vegetables (+10.1%).

Finally, this year we are seeing slightly higher core inflation figures (1.7% in January-October). This comes due to higher wage inflation, which in Q1-Q3 averaged 7.5%. As we expect wage growth in 2018 to be slightly higher than in 2017 (8.1% vs 7.5%), core inflation should continue to edge upward as well. However, food and energy price inflation should be lower than in 2017.

Contributions to inflation in Latvia


Source: Statistics Latvia, Danske Bank