End to NAFTA would be a major blow to Mexico and its economy could slip into a severe recession

Following a solid increase of 3.2 per cent last year, real GDP in the global economy is forecast to expand by a further 3.3 per cent in 2018, according to The Conference Board of Canada’s World Outlook: Winter 2018.

“Last year was one of the rare periods where growth in the world economy was synchronized with most regions recording higher growth. While the ongoing recovery in the European Union bodes well for growth prospects in 2018, there are some ongoing concerns on the world stage such as the NAFTA and Brexit negotiations,” said principal economist Kip Beckman.

Economic growth continues to pick up in the European Union (EU) and should reach 2.1 per cent in 2018 thanks to a combination of low interest rates, strong domestic demand, and solid growth in the global economy that is helping to support export growth.

The ongoing recovery in Europe is becoming increasingly broad-based, as growth in Germany, Spain, France, and even Italy has been solid. The region’s unemployment rate has dropped below 10 per cent, in part due to labour market reforms in a number of countries.

At the same time, rising wages have helped lift household spending. The main risk in the EU remains the Brexit negotiations, which have become increasingly contentious. The United Kingdom seeks to retain tariff-free access to the European market, but EU negotiators are standing firm on their acceptance of the free movement of labour.

Increasing concerns about the U.K.’s inability to negotiate a deal will continue to restrain its economic growth, which is forecast at just 1.5 per cent this year.

The U.S. economy expanded by 2.2 per cent in 2017, but will accelerate to 2.7 per cent growth this year as it benefits from ongoing strength in labour markets and corporate tax cuts, according to the U.S. Outlook: Winter 2018.

Monthly job gains are averaging 200,000 while the unemployment rate continues to drop. On top of the solid employment growth, low interest rates, strong consumer confidence, low inflation, and manageable debt levels will help household spending continue to expand over the near term.

Investment spending will also continue to grow, in part because of the recovery in spending in the oil patch. World oil prices have recently increased above US$60 a barrel.

The Trump administration remains confident that recently implemented cuts to corporate and personal taxes and the elimination of many regulations should enable the economy to grow by at least 3.0 per cent. However, there is little guarantee that this will lead to a sharp rise in business investment.

Attaining significantly higher economic growth will also be made difficult by an aging population that will restrain increases in the labour force and keep productivity growth weak.

A large concern with the tax cuts is the impact on the fiscal deficit, which is expected to reach the $1 trillion by 2021 due to a combination of lower government revenues and higher spending. Other risks to the U.S. outlook are closely linked to trade, as President Trump has indicated his intention to scrap the North American Free Trade Agreement (NAFTA). But, the fate of NAFTA remains uncertain.

An end to NAFTA would be a major blow to Mexico and its economy could slip into a severe recession if the trade deal is cancelled. Uncertainty surrounding its fate is already hurting business confidence and investment spending, and the peso has depreciated putting upward pressure on import prices and inflation.

Mexico is slated for real GDP growth of 2.2 per cent in 2018, assuming there are no changes to the existing NAFTA. The Latin America region as a whole should achieve economic growth of 2.6 per cent in 2018.

The emergence from recession in the key economies of Brazil and Argentina have helped to lift overall growth back into positive territory, alongside recovery in many global commodity prices, including oil and copper.

In the Asia-Pacific region, steady growth at close to 5 per cent is anticipated as it continues to benefit from solid growth in the world economy that will help boost export demand. Economic growth in China will remain about 6.5 per cent over the near term, a drop from 6.8 per cent growth in 2018.

Elevated global demand for high-technology goods has led to solid growth in manufacturing activity. The slightly weaker growth this year is due largely to the government’s attempts to tackle pollution and lower risk in China’s financial sector.

Meanwhile in Japan, growth will weaken to 1.4 per cent this year from 1.8 per cent in 2017 as the country continues to grapple with a declining population and weak productivity growth.