In 2017 the world economy, as measured by economic growth, reached its best condition in over a decade. Corporate expenditure picked up as a result of accelerating earnings growth and increasing confidence, and emerging markets shared in the growth recovery of the developed markets. This resulted in a broad-based recovery of economic activity. Global economic growth has accelerated to 3.7% in 2017, compared with 3.0% in 2016.
From a sustainability perspective, the view on the world economy in 2017 is mixed, as increased economic activity is expected to have led to an increase in CO2 emissions in 2017. That means the world is even further away from the targets that have been set in the Paris Agreement in 2017. The retreat of the US out of the Paris Agreement was a disappointment for a further and faster reduction of CO2 emissions. Social inclusion was set back in 2017 by a rise of global inequality within a lot of countries. This trend is not likely to be reversed soon, since the share of capital gains compared to labour income in economic growth seems to be structurally higher after the financial crisis.
On the other hand, more businesses and investors are becoming conscious of sustainability as being part of their core business. Sometimes only as a risk factor, but that is a start. Also governments, for instance in Europe and China, are more and more promoting sustainable practices such as a transition towards a circular economy. The urgency of a transition to a more sustainable economy seems to have landed in many places.
Especially in the US, inflation is lower than might be expected at this stage in the economic cycle. Especially wage inflation considering the relative tight labour market. In the eurozone, core inflation fell to 0.9% year over year, following a slight increase earlier in the year.
Inflation and monetary policy
Inflation, especially wage inflation, remains (well-) below the targets set by the central banks. The modest rate of inflation is the main reason why the Federal Reserve and ECB try to normalise their monetary policies very gradually, despite the relatively strong economic growth. The Federal Reserve raised its interest rate in March, June, and December, and announced in September its intention to reduce its balance sheet. Furthermore, Jerome Powell was nominated as new Federal Reserve chairman. Meanwhile, the ECB prepared the market for its announcement in October of a reduction of its monthly bond purchases from EUR 60 billion to EUR 30 billion starting in January 2018. The programme remains open-ended.