Confidence has firmed up across a broad front, and there are favourable signs in the global economy. The Bank of Finland foresees global growth strengthening relative to 2016 and continuing at a pace of over 3% in 2017–2019. Although the outlook for the real economy is generally favourable, in the global economy there are also new concerns looming and risks remain tilted to the downside.
According to the Bank of Finland forecast, global growth will not accelerate in 2018–2019, with Chinese economic activity set for a controlled slowdown to around 5%, thereby dampening the improvement in the global economy. Growth in China will decelerate as the economy shifts from investment-oriented to consumption-driven growth, with growth no longer sustained by taking on additional debt as in the past. The downside risks to the international economy relate to a faster-than-forecast slowing of China's debt-based growth.
The evolution of the global economy and international trade will be affected by the economic policy of the new US administration. The US economy is expected to grow at a pace of well over 2% in 2017–2019. Growth could be faster than forecast if the new administration's expected growth-enhancing measures were to materialise in full. On the other hand, a potential increase in protectionist actions may impair the expansion of the global economy and trade. In addition, even if deregulation could strengthen growth in the short term, dismantling financial market regulations, in particular, would increase the risks to financial stability over the longer term.
The euro area economy has continued to grow. The unemployment rate has declined to below 10%, and the general government deficit has contracted. Growth prospects in Europe are nevertheless clouded by the uncertainty surrounding the negotiations on the withdrawal of the United Kingdom from the EU and by concerns about the condition of the banking sector and the outlook for the public finances in certain euro area countries. Despite the risks to EU22 growth prospects being tilted to the downside, growth is expected to continue at a pace of just under 2%, supported by stable global activity and accommodative financing conditions.
The elevation of the oil price relative to last year is reflected in a pick-up in inflation on a global scale and in the euro area, too. The oil price has been pushed up by both higher growth expectations and output restrictions set by key oil producers. Oil price movements lead to only temporary fluctuations in inflation. Given that there is still slack in the euro area economy, pressures for significant increases in wages and, through that channel, in inflation are limited.
For further information, please contact: Hanna Freystätter, Senior Adviser, tel. +358 10 831 2490.
The package of articles on monetary policy and the international economic forecast will be published in English in the beginning of April at www.bofbulletin.fi.