Saturday 04/04/2020

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The global economy between the old and the new, between hope and fear

Chief Economist

“There are years that ask questions and years that answer,” said American novelist Zora Neale Hurston. 2016 offered a few answers, but asked many more questions. It remains to be seen what 2017 will bring. Back in December 2010, who could have predicted that Tunisian market vendor Mohamed Bouazizi would set himself on fire and thereby ignite the spark that would blow up the situation in the Middle-East?

Last month the American central bank increased the basic rate for just the second time in ten years. It was able to do this because the global economy is in calmer waters nowadays.

2016 in a nutshell

Even so, the year started off anything but calmly. In January equity markets plummeted due to continued concerns about China. Moreover, the US economy got off to a disappointing start due to the harsh winter weather, the strong dollar and the extremely weak investments in the shale oil sector due to continually falling oil prices. And to make matters worse, the British cast a protest vote against the European Union, immigration and globalisation. Meanwhile, interest rates reached new lows.

Still, Chinese figures gradually showed signs of stabilising, and confidence among Western families and businesses rallied in the second half of the year. The meagre economic recovery in Europe started to gain momentum.

Even a heavyweight like Donald Trump could not change that. In the wake of his victory speech, the interest rate rose and equity prices soared. The Italian no-vote did bring down Renzi, but financial market optimism stood firm.

What will 2017 bring?

The future is uncertain by nature. Dutch poet Cees Buddingh put it more forcefully: “an economist is someone who does not know either.” And Albert Einstein said: “I never think of the future, it comes soon enough.”

Indeed, the future is already here. The referendum once again uncovered the predicament of the Italian banking sector. The immediate consequences of the Brexit vote were better than expected, but of course the difficult Brexit process has yet to begin.

And even though China recovered its balance in the year of the monkey, the year of the rooster could once again shake up financial markets. Credit growth and the rise of house price in cities like Shanghai and Beijing are simply not sustainable.

Trump, with his plans to double US growth to 4%, is still on cloud 9 after his election. Time is ticking even before he has officially taken the helm. After all, he promised extensive infrastructure development and substantial tax cuts, and he will have to deliver quickly so as not to disappoint financial markets. Meanwhile he must deal with an increasingly expensive dollar. This puts pressure on American exports and clashes with his plans to reinvigorate the country’s industrial sector. This increases the risk of a more protectionist trade reflex, retaliatory actions and further deglobalisation.

Quo vadis, Europe?

Elections in the Netherlands, France and Germany will make 2017 another challenging year. Given the relatively larger welfare state, the less acute refugee crisis and the recovering European economy, a large destabilising political outcome is not the most likely for now.

But we must remain vigilant. Populism is on the rise. Moreover, the easiest part of the economic recovery is behind us. Economic tailwinds - caused by falling interest rates, the low euro exchange rate, lower commodity prices, and the lifting of austerity measures from recent years - are weakening. For economic recovery to continue making sustainable progress, European governments must step up their investment policies. Unfortunately we have yet to see convincing signs to that effect. On the other hand, the situation in the Middle-East remains critical and the refugee deal with Turkey is not exactly a gem, but rather the opposite.

Between peace and war

Over eight years after the Great Recession started, the global economy is still dealing with its after-effects. And political and geopolitical tensions seem to be mounting. The Arab spring paved the way for winter. And Russian president Putin is gaining confidence on the international stage. For its part, China intercepted an American submarine drone a couple of weeks ago. Brand new Nobel Prize winner for Literature Bob Dylan once put it thus: “it is impossible to think globally and be for peace at the same time.”

But let us conclude on a hopeful note, as we should when we move from old to new: may the best moments of 2016 be the worst of 2017.