(ARTICLE WRITTEN BY ANTOINE BRIFFA)
Optimism is a word that is much more at comfort going into 2018 than it ever was in 2017; growth is a constant almost globally, and deflation is off the vocabulary. Europe is forcing its way ahead, China hasn’t collapsed yet and the United States continues to hover at high levels despite a President whose sense of economics is lacking.
However, the risks to a goldilocks scenario have seldom been greater and the following are the main triggers that may shift expectations and eventually paint the outcome for the coming financial year.
Interest rate policy
Current Federal Reserve Chairperson Janet Yeller has, arguably, handled three interest rate increases flawlessly. However, her time is up and prospective new chair, Jerome Powell, has to balance high employment and low inflation; not an ideal scenario. Getting it right for the Fed has never been so difficult.
Europe also has its worries. 2018 should be the year that finally sees the ECB stopping monetary expansion. However, markets still expect a prolonged transition period characterised by low rates. Statements coming from top ECB officials will weigh at least as much as economic data.
China continues to power ahead. A projected debt implosion has failed to materialize, for the time being! With the US giving up its leadership role, China is acting fast to fill in the gaps. Growth in 2018 is forecast to slow, ‘a little bit’ once more, as the government attempts to reign in leveraged companies. This is the year that China has a chance to cement its power at the expense of the West.
The United States has effectively signalled that it is ready to go for broke in the race for corporate taxation. The EU on the other hand is struggling to convince member states to harmonise taxation. 2018 will probably be the year when competition heats up. Some developed economies will probably follow the United States and Brexit Britain may have such a move up its sleeve.
But all this only spells out into a global expansionary fiscal scenario, with so many countries just out or still in a debt crisis, a tax cut may not be the exact prescription required.
Donald Trump remains the wild card. It seems that each step the US takes on the international stage is a calculated step towards trouble. Given an excuse, the Trump administration will have a chance to show-off its toys. A miscalculation that sparks conflict is probably the most significant outlier in any forecast for 2018.
2018 will also be a crucial year for Brexit as for Theresa May. The UK is moving towards the more intense divorce phase. If 2017 and the exit bill are to be taken as an indication of what is to come, than subtlety will not be on the negotiating table.
A presidential campaign in Mexico will make it harder for candidates to appear weak against a bullying United States. If NAFTA negotiations were to fail the subsequent void, this would not only hurt Mexico but would probably also send most to the US agriculture producing states into recession.
Elsewhere, countries increasingly seen hostile to one another may lead to another resurgence in protectionism. Complex regulations, bailouts and pressure to ‘buy local’ are all non-traditional trade barriers. A drive to protect intellectual property and technology is also developing into a new age trade war.
China and the US, in particular, are racing to dominate areas like artificial intelligence and supercomputing. This new IT cold war could result in a break down in investment flows as the US tries to restrict control of its tech companies and China using its political weight to monopolise Asian technology.
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