Growth Trends

Despite the multiple risks to business and household confidence in 2017, the world economy has held up rather well. Several key trends should support growth into 2018 and 2019 and have a positive impact on global deal values.

As we head into 2018, two key regions of the world economy are growing faster than we anticipated in our last edition, improving the outlook for world growth.

In China, fiscal stimulus is boosting infrastructure spending and supporting household incomes. At the same time, the new US administration’s failure to enact protectionist measures thus far is enabling manufacturing firms to regain confidence and resume investment. As such, Oxford Economics revised its forecast for Chinese GDP growth in 2018 from 5.9% earlier this year to 6.2%.

In the Eurozone, easing fears over Brexit and populism have buoyed business and household confidence, which has supported positive economic fundamentals. Oxford Economics raised its forecast for GDP growth in the Eurozone in 2018 from 1.6% to 1.9%.

In aggregate, Oxford Economics forecasts that global GDP growth will accelerate to a cyclical peak of 3% in 2018. Following that peak, however, the potential for cyclical catch-up growth in the Eurozone will have been exhausted, and growth in other major economies such as the US and Japan will also cool.

Stronger demand around the world is causing a rebound in China’s processing industry, comprised of companies that assemble components sourced from elsewhere. Activity in the processing sector contracted through most of 2015 and 2016 but recovered lost ground in 2017.

This recovery has stimulated activity in supply chains around Asia. Shipments from South Korea and Taiwan to China, for example, rose by more than 20% year-on-year in the first quarter of 2017. Key physical measures of world trade, such as container shipping and air freight, are now growing at their fastest rates since before the global crisis. Oxford Economics forecasts that global trade will grow by 4.8% in 2017, the fastest rate since 2011, and remain above 3.5% from 2018 through 2020.

Potential Risks A range of upside and downside risks could impact the global economy and lead to a rise or drop in deal values and volumes that differ from our transactions forecast. Those risks include: Policy missteps by the US administration: A sharp sell-off in the US corporate bond market could quickly spread through the world economy via exchange-traded funds. This would undermine firms’ access to finance and lower their appetite for dealmaking. The impact of asset price falls on corporate wealth could also hurt global deal appetite. Risk aversion over US corporate debt: A sharp sell-off in the US corporate bond market could quickly spread through the world economy via exchange-traded funds. This would undermine firms’ access to finance and lower their appetite for dealmaking. The impact of asset price falls on corporate wealth could also hurt global deal appetite. The potential for a disruptive Brexit: Failure to make progress on Brexit negotiations would renew sterling’s depreciation and cause a sharp fall in UK consumer spending. The impact on trade and business confidence would exacerbate existing vulnerabilities in the Eurozone banking sector. Cyclical acceleration in global trade: With trade rising faster than expected in 2017, businesses could expand capacity faster than currently forecast, boosting consumer spending via high demands for labor. This in turn could generate still-faster trade growth and boost dealmaking in key trading sectors such as manufactured goods and internationally-traded service sectors. China government lowers growth target: Gross debt has risen from 143% of GDP to 263% of GDP inside a decade, raising financial risk in China. To tackle these financial risks, the government could cut its GDP growth target, enabling slower credit growth. This would slow global trade and GDP growth, and cool the global dealmaking environment. As we head into 2018, two key regions of the world economy are growing faster than we anticipated in our last edition, improving the outlook for world growth. In China, fiscal stimulus is boosting infrastructure spending and supporting household incomes. At the same time, the new US administration’s failure to enact protectionist measures thus far is enabling manufacturing firms to regain confidence and resume investment. As such, Oxford Economics revised its forecast for Chinese GDP growth in 2018 from 5.9% earlier this year to 6.2%. In the Eurozone, easing fears over Brexit and populism have buoyed business and household confidence, which has supported positive economic fundamentals. Oxford Economics raised its forecast for GDP growth in the Eurozone in 2018 from 1.6% to 1.9%. In aggregate, Oxford Economics forecasts that global GDP growth will accelerate to a cyclical peak of 3% in 2018. Following that peak, however, the potential for cyclical catch-up growth in the Eurozone will have been exhausted, and growth in other major economies such as the US and Japan will also cool. 1 Stronger global demand GDP Growth Chart 2 Supply-chain Renaissance Stronger demand around the world is causing a rebound in China’s processing industry, comprised of companies that assemble components sourced from elsewhere. Activity in the processing sector contracted through most of 2015 and 2016 but recovered lost ground in 2017. This recovery has stimulated activity in supply chains around Asia. Shipments from South Korea and Taiwan to China, for example, rose by more than 20% year-on-year in the first quarter of 2017. Key physical measures of world trade, such as container shipping and air freight, are now growing at their fastest rates since before the global crisis. Oxford Economics forecasts that global trade will grow by 4.8% in 2017, the fastest rate since 2011, and remain above 3.5% from 2018 through 2020. 3 Gradual correction in stock market valuations Alongside the pickup in global growth and easing fears of protectionism, global equity markets have rallied through 2017. Equity markets should continue to enjoy the momentum of improving fundamentals for the next two years. Solid global trade and GDP growth, easing political risk, and cheap finance are key factors in maintaining future growth. However, in key markets such as the US, a gap seems to be appearing between stock market valuations and underlying corporate profits. We assume this gap will gradually narrow through 2019 and 2020, although a sharper correction is a potential risk to our forecast.