The good news first: Barring a zombie apocalypse or a sudden spontaneous collapse in asset prices, the current Goldilocks environment of synchronized, above-trend global economic growth and low but gently rising inflation will likely persist in 2018.

In fact, recent growth momentum has been even better than expected across many economies, providing a strong ramp into next year. Moreover, easier financial conditions (reflecting buoyant markets for risk assets and still-low interest rates) imply sustained near-term tailwinds, and fiscal stimulus in the U.S. and elsewhere in the advanced economies is forthcoming. Meanwhile, China keeps suppressing domestic economic and financial volatility while fundamentals in many other emerging market (EM) economies continue to improve. Taken together, PIMCO’s baseline forecast is for world real GDP growth in a 3% to 3.5% channel in 2018, about the same as in 2017 and a quarter point higher than in our September forecast.

However, a Goldilocks-extended scenario is very much baked into the consensus and asset prices. During our December Cyclical Forum we expressed confidence in our baseline economic prognosis, and we zoomed in on the potential shorter- and longer-term consequences of synchronized global growth, fiscal stimulus in the U.S. at a time of already high resource utilization and the reduction of monetary accommodation by major central banks. In a nutshell, we concluded that 2017–2018 could well mark the peak for economic growth in this cycle and that investors should start preparing for several key risks that lie ahead in 2018 and beyond. Here’s why:

Borrowing from the future

First, the prospective U.S. fiscal expansion in 2018 – worth close to 0.5% of GDP in 2018, half of which is likely to come from tax cuts and half from higher federal spending – appears dictated by the political cycle rather than the economic cycle. Fulfilling last year’s presidential election campaign promises and delivering tax cuts and spending increases ahead of next year’s congressional midterm elections makes political sense but could have detrimental longer-term economic consequences. Why?

Arguably, the last thing an economy operating at close to full employment in the ninth year of an economic expansion needs is a shot in the arm from fiscal policy:

    • Adding around $1 trillion to the public debt over 10 years (according to the Joint Committee on Taxation estimates) without adding much to potential growth and thus future tax revenues looks manageable while interest rates are low, but would come back to haunt the public coffers if rates rise in the future.