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Annual economic outlook for 2018

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Annual economic outlook for 2018

Prospects for a record long business cycle expansion – According to the National Bureau of Economic Research (NBER), the longest business cycle expansion in recorded US economic history was the 10-year period from March 1991 to March 2001. Since the current US expansion dates from the trough in June 2009, it has already been underway for just over 100 months. I am confident that the previous record of 120 months will be exceeded. Global economic activity has strengthened during 2017, with good performance in the US during the second and third quarters and a steadily improving performance in continental Europe throughout the year. In China, however, economic momentum has been weakening, led by a mild slowdown in the property sector, but in most of the other emerging economies momentum is improving.

Economies operating at close to full capacity – Looking ahead to 2018, I expect economic activity to remain buoyant, but in contrast with most economists, I do not automatically assume that this will mean higher inflation. Unemployment has fallen to 4.1% in the US, 4.3% in the UK and 3.7% in Germany, while in Japan the ratio of job offers-to-applicants (another measure of labor force tightness) has risen to 1.55, its highest level since 1973. However, participation rates in several countries are low and many part-time workers would like to be working either longer hours or full time.

Inflation still subdued and not yet a threat to expansion – For several years, consumer price inflation (CPI) and core inflation have been running below the target rate of 2% in most developed economies. Against a backdrop of unconventional monetary easing via quantitative easing (QE), exceptionally low levels of interest rates and continuing budget deficits, low inflation has been something of a puzzle to many economists and central bankers - notably including Janet Yellen (who confessed to not understanding why inflation remained so low). The correct answer has little to do with the Phillips curve or output gaps, but underlying monetary growth, which has remained low in most major developed economies. As long as this remains the case and inflation and inflation expectations also remain low, there is no reason to expect a monetary policy tightening of the kind that would threaten to end the business cycle expansion.

Source : Invesco Real Estate

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