The past several years have been characterised by a worldwide economic expansion that is broadly synchronised between the U.S., Europe and Asia. In 2017, the global economy grew by 3.7%, the fastest increase seen in seven years. Asia, which currently accounts for more than 60% of global growth, remains the most significant driving factor behind the world's economic expansion.
While Japan continues to battle deflation, inflationary risks have been successfully contained in most advanced economies so far. Even in most Asian countries, inflation has remained subdued in spite of solid growth, relatively tight labor markets and rising domestic consumption. That said, vigilance is warranted as the convergence of low commodity prices, low yields in the capital markets and consistent underestimation of inflation expectations in Asia may soon come to an end. Additionally, foreign monetary policy decisions may also have a considerable direct or indirect effect on Asian economies.
Even though the short-term macroeconomic outlook remains generally positive, the expansion is starting to diverge geographically and growth rates seem to be peaking in several countries. Additionally, while financial conditions remain generally favorable across most economies worldwide, several risks are starting to mount, most notably escalating tensions and uncertainty around international trade, rising geopolitical risks, high levels of global debt and stretched valuations in certain markets.
Tensions and uncertainty around international trade have increased for several years as part of a global trend towards increased protectionism. This trend has escalated considerably by recent tariff announcements made by the U.S. and retaliatory measures from its trading partners.
In addition to impacting international trade and global output directly, the effect of tariffs through non-trade channels could be even more damaging. According to studies by the IMF, they could also impact financial markets, business and consumer confidence as well as foreign and domestic direct investment.
Continued uncertainty surrounding the U.K.'s post-Brexit trade relationship with the EU is another significant source of concern even though the ultimate macroeconomic impact of the U.K.'s decision to leave the European Union remains hard to predict at this point. A further escalation of tensions and uncertainty with respect to international trade is arguably the greatest near-term threat to global growth.