My forecast for the global economy has not changed this quarter. I still expect inflation-adjusted, global economic growth to accelerate to about 3.5 percent in 2018. This follows a stronger-than-expected gain of a little more than 3 percent last year. This forecast is based on expectations for steady GDP expansions in all the advanced economies, especially the U.S., where recently enacted tax reforms will add momentum to the economic expansion for the next three quarters.
The faster growth from the United States, along with solid gains in Europe, Japan and China, will spur stronger overall growth of at least 4.5 percent in the emerging economies this year. Once again, India is expected to experience the strongest GDP growth, with a gain of at least 7 percent. Closer to home, the overall gain in Latin America will be 2 percent in 2018. This will be slower than the global average this year, but it is a noticeable improvement from previous few years.
In short, the synchronous global recovery will remain intact through at least the end of this year.
The two segments of the plastics industry that will experience the greatest benefit from this expected acceleration in global economic activity are materials suppliers and equipment manufacturers. The global recovery cycle has entered a phase in which spending for capital equipment expands rapidly. The U.S. economy entered this phase a couple of years ago. Machinery sales in the United States have been strong for the past few years, and we have also witnessed a substantial increase recently in resin production capacity. The good news is that a rise in capex spending is now ramping up around the world.
Obviously, processors who export their plastics products can expect to see a direct benefit from increased global economic growth. But regardless of whether your company exports, the entire U.S.-based plastics industry will get a boost from the stronger global fundamentals in 2018.
This positive global outlook notwithstanding, I feel like it takes some fortitude to forecast stronger growth in 2018. My confidence is being tested by the burgeoning uncertainty over U.S. trade policy, and I am sure I am not alone. The underlying fundamentals pertaining to aggregate global demand are as strong as ever, and the logical side of my brain believes these fundamentals will prevail. But I cannot shake the perception of ominous forces at work. Economics is indeed a dismal science.
Right now, I cannot help but compare the current phase of synchronous global economic recovery to a baseball game in which my team's pitcher is throwing a perfect game. I know it is rare and tenuous, and both my expectations and fears have risen as the recovery has progressed.
This kind of tension is what makes being a sports fan interesting and fun, but I do not know anybody in business who likes economic tension and uncertainty — there is too much at stake. Unfortunately, uncertainty about the global economy is starting to escalate due to the recent talk of tariffs and trade wars.
So far, the Trump administration has announced tariffs on solar panels, washing machines, steel and aluminum. These products account for less than 2 percent of U.S. goods imports, when you factor in exemptions for Canada and Mexico. So one can make a strong argument that the overall effect on our economy from these proposed tariffs will be slight.
This argument is bolstered by the fact that the initial response to these tariffs from other countries has been moderate. There have not yet been any retaliatory actions of substance taken by any of our trade partners. I think there are three reasons for this. First, world leaders have figured out that Trump's tendency is to open negotiations with bold, even brash, statements that placate his political base. But this is typically just a first step. When shielded from the media, he allows himself room for flexibility, and he is often open to counterproposals.
Second, virtually all countries have tariffs on certain products. The average tariff rate on products imported into the U.S. has been trending downward for the past 20 years, and we currently have a relatively low level of tariffs when compared with many other countries, especially China. If left unchanged, Trump's proposal will raise the average tariff in the United States a bit, but it is impossible to predict just how much. As of right now, cooler heads continue to prevail.
Finally, it is becoming increasingly clear that better trade terms with China is Trump's real objective. Canada and Mexico may be within earshot when Trump speaks, but I sense that his intended audience is in Beijing. China has garnered a huge share of the world's export market in a relatively short time, and they have certainly not played "fair" in doing so. Trump is not the only world leader who knows that China has been dumping steel (and other products) on the world market for quite a while.
Nevertheless, the talk of tariffs has ramped up tension levels in the United States. This rising tension has prompted many U.S. trade associations, including the Plastics Industry Association and the American Chemistry Council, to come out strongly against the Trump administration's proposed tariffs on steel and aluminum. A recent article in this magazine reported that the Plastics Industry Association's website called the proposed tariffs "devasting to our businesses and our industry."
Now that's a bold forecast. And as a longtime practitioner of the art and science of forecasting, I appreciate a bold forecast. This one might be more politically motivated than statistically based, so I am not quite ready to go there just yet. However, I am a longtime advocate of free trade and free markets, which means that I am philosophically opposed to tariffs.
But many of our major trading partners already impose larger tariffs on their imported goods than the United States does. I am not convinced that retaliatory tariffs are ultimately our best strategy for solving this problem. But if the tariffs (or even the threat of tariffs) proposed so far by the Trump administration results in fairer trade and a lower trade deficit with China, then maybe this will not be so devastating to our industry in the long game.
