My main theme in the second half of this year has been that the US economic recovery is gaining momentum. We have seen back-to-back quarters of better than 3% GDP growth in the 2Q and 3Q. Just yesterday, the Commerce Department reported that 3Q GDP rose at an annual rate of 3.3%, up from 3.0% in its advance report last month.
Most forecasters expect a third consecutive quarter of at least 3% growth in the 4Q. If so, that would be the best string of economic growth since before the Great Recession of 2008. And this upswing in economic growth is not limited to the US. Economic growth is accelerating in many parts of the world today.
This week, Goldman Sachs released a new report which predicts that global economic growth is accelerating in most countries around the world. Headquartered in the US, Goldman Sachs is one of the largest multinational investment banks in the world.
In its latest report entitled “As Good As It Gets,” Goldman upped its estimate of global economic growth for 2018 from 3.7% to 4.0%. Goldman’s previous forecast was already above the consensus of most forecasters, and this week’s estimate is even more optimistic. It is broad-based across both developed and most emerging market economies.
Goldman’s latest forecast of 4% global economic growth next year compares to the latest International Monetary Fund (IMF) estimate of 3.6% for 2017 and 3.7% for 2018, both of which were revised upward in October.
At the core of Goldman’s strong global economic outlook is the premise that international productivity is experiencing a significant improvement from its post-Great Recession downtrend. The authors argue that spare production capacity is diminishing rapidly in many parts of the global economy, and is already basically exhausted in numerous areas including the US.
Goldman believes the US economy, for example, will record GDP growth of 3.7% for all of 2017, versus the current consensus view that GDP is growing at only a 3.3% rate this year. If this estimate from Goldman is to be correct, that means the US will record another strong growth period in the 4Q. But we won’t know that until the end of January when we get the Commerce Department’s advance estimate of 4Q GDP growth. So the jury is still out, but Goldman is very confident in its latest forecast.
Goldman has an internal gauge of global economic growth which it refers to as the Current Activity Indicator (CIA). As with global GDP, the CIA has been in a strong uptrend since the beginning of 2016, as you can see in the chart below.
Goldman points out that the strength in global growth is broad-based across countries. Specifically, growth has recently exceeded its post-crisis average across almost all major developed nations and emerging countries. They note that even though a number of emerging nations’ economies have recently outpaced their post-crisis averages, Goldman believes there is still room for improvement next year.
Further supporting Goldman’s optimism looking forward is its belief that Congress will pass meaningful tax reform – if not before the end of this year, then by early 2018. Goldman puts the odds of this at 80%; I wish my confidence was that high, but that’s a discussion for another time. In any event, Goldman believes that tax reform will pass and have a positive impact on US economic growth in both 2018 and 2019.
Finally, in light of its even stronger economic forecast for 2018 and 2019, the Goldman report addresses the obvious question of what this means for inflation going forward. Goldman believes that inflation has remained below expectations the last few years primarily as a result of weakness in import and commodity prices.
While they expect import and commodity prices to rise modestly as a result of their stronger economic forecasts, they expect only a “gradual increase in core inflation” in the next couple of years. Even if this encourages the Fed and other central bankers to raise interest rates modestly several times over the next couple of years, Goldman does not think such increases will derail its optimistic economic projections.
In summary, Goldman remains quite optimistic regarding global economic growth potential for the next couple of years. The biggest risk they see in their outlook is the potential for a military conflict in the Korean peninsula. This is not to say that Goldman’s latest upbeat forecast will prove to be accurate, but it is more evidence that the outlook for the US economy continues to improve.