Outlook for 2018

December 18, 2017

The global economy is currently growing at its fastest pace in over five years; and the good economic news is likely to continue into 2018.

Economy outlookGood economic news is likely to continue into 2018.

Economic outlook

Global economic growth in 2017 has been the strongest since the 2010 rebound from the depths of the Global Financial Crisis. We expect this strength to continue in 2018, with most parts of the world experiencing healthy growth.

Consumer spending should remain well supported on the back of very low unemployment and slightly stronger wage growth, which has already boosted consumer confidence.

Business confidence is also at high levels, and that has led to a long-awaited upturn in investment. With high profitability and low interest rates, we expect this to continue into the New Year.

In New Zealand, economic growth has lost some momentum, with GDP growth expected to slow in 2018. Although the economy has shown resilience through 2017, there are headwinds going into the New Year. These include a downturn in net migration, with population growth expected to fall significantly over the near-term. Construction activity has also flattened off in the face off skilled labour shortages, difficulties in sourcing finance and rising construction costs. Business confidence (and intended investment spending) has fallen sharply, with the change of government another perceived headwind.

Market outlook

The share rally that began in 2009 is one of the longest and largest on record; US equities for example had risen for 13 consecutive months as of November, their longest ever monthly winning streak

We expect equities to rise modestly in 2018, largely on the back of continuing economic strength that should lead to another year of strong earnings growth in most economies. The outlook for earnings growth is a little more uncertain in New Zealand, but the local market will continue to be supported by a relatively high dividend yield.

Meanwhile government bond yields remain at exceptionally low levels everywhere. The most notable move in bond markets in 2017 was the rise in two-year US bond yields, from around 1% to just over 1.5% in December; a result of the US Federal Reserve raising interest rates by 0.25% in March, June and December respectively. The target range for the federal funds rate is now 1.25% to 1.5%.

We expect the Fed to raise interest rates three or four times next year which is likely to lead to further rises in US bond yields. Government bond yields elsewhere are also expected to rise, even though central banks in Europe and Asia are likely to adopt a more cautious approach to withdrawing monetary stimulus. The Reserve Bank of New Zealand is not expected to raise interest rates until at least 2019.


The biggest risk to almost all financial markets is monetary policy. Economies and equities could be undermined if the US Fed and other central banks raise interest rates aggressively in response to higher inflation.

The usual cocktail of political risks remains such as the possibility of a trade war involving the US or a further escalation in tensions between the US and North Korea as well as ongoing Brexit discussions. These are difficult to quantify but, as has been the case in 2017, are unlikely to materially weaken growth. 

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