A decade on, the legacy of the global financial crisis persists, even though 2018 should see another year of robust growth. Monetary stimulus continues virtually everywhere, boosting property and financial markets; income inequality is still rising; and populism is still growing.
Governments must now ensure that the benefits of growth are more widely shared, both to support growth and to prevent a further shift towards more political extremes.
Since the great recession there has been growing polarisation of household income growth and wealth in the advanced economies. Wage growth of lower-skilled, lower-paid workers remains weaker than in more-skilled jobs.
Lower earners have not shared in the hefty asset price gains that continued throughout 2017, but they are squeezed hardest by rising inflation driven by higher energy prices. True, in countries such as the US and UK with tight labour markets, youth unemployment is falling faster than in the wider economy, but rates still far exceed national averages.
Income inequality suppresses consumer spending because low earners spend a higher share of their incomes. It can also be negative for overall growth if the savings of high earners are merely parked in property or government bonds rather than productive investment.
Inequality of incomes also often goes hand in hand with disparities in life expectancy, education, skill levels and labour mobility that will impact on future productivity and growth potential – reducing government revenues and the ability to fund public services.
Governments are aware of the economic and political dangers, but countries that have accumulated huge debts since the global financial crisis face big political choices. Do they help the market to deliver more inclusive growth? Do they raise taxation to finance more redistribution? Do they borrow even more? Or do they retreat into protectionism?
China has now promised to make growth more inclusive and sustainable. Despite its GDP growth slowing in late 2017, we still expect 6.7 per cent expansion this year, rising to 6.9 per cent in 2019, but the shift towards cleaner, fairer, more innovative expansion implies a change in China’s import mix, with demand for industrial and office machinery, and even consumer goods and services, replacing construction-led growth.
This should benefit Germany, Japan, Korea and Taiwan plus some new trading partners.
US policy, however, is to take back growth at the expense of other countries, either through cutting corporate taxes or hampering trade flows. It is hard to see the new tax reforms supporting more inclusive growth if the direct gains accrue mainly to higher-earners and companies.
The long-term impact will depend on how corporate gains feed into higher investment and productivity growth. Nonetheless, the one-off demand boost has raised our 2019 GDP forecast to 2.3 per cent from 2 per cent.
Our global growth forecasts have been modestly upgraded – to 2.9 per cent for 2018 and 2.8 per cent in 2019 – but even with a small energy-induced rise in inflation, we see central banks remaining cautious.
We anticipate two more quarter-point increases in the US this year and another in 2019, but no change in Japan and nothing from the European Central Bank until next year. We expect gradual rate rises in most Latin American and Central Eastern European countries, where inflation is a bit higher, but for India and Indonesia, we predict no rate rises at all, even in 2019.
This research was first published on 18 December 2017.