A Partly Sunny Economic Outlook

NAR economist George Ratiu evaluates our emergence from last recession’s winter into an economic spring, marked by steady growth of the global economy.

It feels good to see more sunshine and watch tree buds blossom into a colorful tapestry. This past winter has certainly been eventful. From Nor’easters, thundersnows, polar vortices and squall lines to arctic blasts, hoarfrosts and bomb cyclones (“bombogenesis” certainly made quite a linguistic splash), we have had a plethora of weather events. As we thaw into spring, we look forward to leaving the harsh winter’s terminology behind.

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Global economies advance under sunnier skies

George Ratiu

On the economy front, we also seem to be emerging from the long grip of last recession’s winter. Just a year ago, developed economies were gazing into the potential darkness of economic declines, with central banks resorting to negative interest rates. Since the third quarter of 2016, world economies have rebounded and found a steady, upward path, marching under sunnier skies.

Global economic activity picked up in 2017, with output estimated at 3.7 percent, slightly faster than projected by the International Monetary Fund. Just as important, 75 percent of the world economy experienced accelerating growth this past year. The IMF adjusted its growth forecast for global economies upward, to 3.9 percent for both 2018 and 2019.

The economic gains were most noticeable across Europe, where the anxiety sparked by the 2016 U.K. referendum decision to leave the European Union gave way to a more tempered outlook. The EU notched broad-based economic growth in 2017, driven especially by peripheral countries like Ireland, Latvia, Poland, the Czech Republic, Slovenia and Estonia, all of which posted GDP growth above 4.0 percent. The U.K., Germany, France, Italy and Switzerland recorded GDP gains in the 1.7 to 2.9 percent range.

Not surprisingly, the European Central Bank announced in October 2017 that it would begin scaling back its bond-buying program starting in January of this year, signaling a change in its monetary easing stance. Mario Draghi—the ECB president—did nuance in subsequent remarks that policy rates will continue at the historically low levels for the duration of the quantitative tightening.

The Asian region was another global area with positive economic performance, as Chinese growth picked up a slight tailwind. While China’s monetary policy remained accommodative, its GDP was expected to close 2017 with a 6.8 percent advance. India’s economy continued its growth pattern, with GDP poised for a 6.5 percent growth rate, despite the country’s massive currency adjustment in 2016. Other Asian economies—Indonesia, Malaysia, the Philippines, South Korea, Thailand and Vietnam among them—reflected the strength of neighboring larger economies, with GDP growth in a solid range of 3.0 to 6.3 percent.

In the Americas, economic trends underscored a rising global tide. Canada registered solid economic gains, placing the annual GDP on a path to 3.0 percent annual growth, while Mexico’s economy took a more moderate path, with GDP projected to close 2017 with a 2.1 percent gain. Canada and Mexico remained engaged in renegotiating the North American Free Trade Agreement with the United States, as the shadow of a White House administration more wary of international trade hung over the discussions, especially with the enactment of tariffs on steel and aluminum imports. The economies of Colombia, Chile and Argentina remained positive, at 2.0 to 2.8 percent GDP growth, while Venezuela’s political crisis deepened its economic woes.  Brazil’s 2016 post-Olympic slump reversed in 2017, leading to a 2.1 percent GDP advance.

US economic expansion turns nine years old

The U.S. economy is entering its ninth year of expansion, and most indicators point in an upward direction. While confounding economists’ expectations, gross domestic product has nonetheless been expanding at a steady pace, driven by a combination of higher consumer spending, rising business investments and solid export activity.

The employment advances have certainly brightened the landscape, as companies have added 2.2 million new jobs to payrolls during 2017, bringing the 2010-17 total number of new jobs to 17.8 million. The unemployment rate declined from 4.8 percent in January of 2017 to 4.1 percent by January of 2018, a significant improvement from the Great Recession high of 10.0 percent. Just as important, employment gains over this period have been broad-based, across most sectors.

U.S. monetary policy has also reflected the pace of economic gains. The Federal Open Market Committee voted for three rate hikes during 2017, citing the low unemployment rate and signs of upward pressures on inflation. The Fed also further tightened monetary policy, as it announced in October of 2017 that it would begin divesting some of its $4.5 trillion in assets starting in 2018, by allowing maturing bonds to roll off its balance sheet without reinvesting the payments.

With the change in Presidential administration in January 2017 and the Republican party’s majority in Congress, tax reform—which had been a major campaign item—contoured more precisely and picked up speed during the year. The legislative negotiation process produced a final bill—the Tax Cuts and Jobs Act—which was approved and signed by the President in December of last year.

Among the tax act’s main provisions are a reduction in tax rates for filers (the act retained the existing seven marginal tax rate brackets) coupled with an increase in the standard deduction, as well as a significant reduction in tax rates for corporations. For residential real estate, the tax act offered a few new provisions, including a cap on deductible mortgage debt of $750,000 and a limit of $10,000 for total state and local property taxes and income or sales taxes. The commercial real estate sections of the tax bill left many of the prior provisions mostly unchanged, such as IRC Section 1031 Like-Kind Exchange rules, carried interest, cost recovery periods for real property and Low Income Housing Tax Credits.

The Tax Act is expected to provide short-term economic stimulus in 2018, with a possible long-term productivity boost assuming that companies employ the tax cuts for further capital investments and worker training. However, given that the Tax Act’s $1.5 trillion price tag may lead to larger budget deficits, interest rates may increase at a slightly faster pace.

Outlook calls for partly sunny skies

As we settle into the balmy days of spring, it is worth noting that we have spent the past eight years looking over our shoulders to the Great Recession and wondering at what point the economy will take off. While the hoped-for great economic leap did not materialize, the steady advances have provided a more balanced landscape and likely offered a more sustainable growth path. As we scan the horizon for signs of change and looming risks, we should take a moment to celebrate that the short-term outlook seems partly sunny. Having said that, it is important to keep in mind that we operate in a constantly shifting environment and risks are ever evolving.

George Ratiu is managing director of housing and commercial research for the National Association of REALTORS®.

You’ll find more on this topic in the April 2018 issue of CPE.