A year ago, I predicted that the most distinctive aspect of 2017 would be uncertainty, fueled by, among other things, Donald Trump’s election as president in the United States and the United Kingdom’s vote to leave the European Union. The only certainty, it seemed, was uncertainty – and that the future could become a very messy place.
it turned out, although 2017 was not a particularly great year, it was far
better than many had feared. Trump proved every bit as bombastic and erratic as
expected. Anyone who paid attention only to his incessant tweets might think the
US was teetering between a trade war and a nuclear war. Trump would insult
Sweden one day, Australia the next, and then the EU – and then support
neo-Nazis at home. And the members of his plutocratic cabinet rival one another
in terms of conflicts of interest, incompetence, and sheer nastiness.
have been some worrisome regulatory rollbacks, especially concerning environmental
protection, not to mention the many hate-driven acts that Trump’s bigotry may
have encouraged. But, so far, the combination of America’s institutions and the
Trump administration’s incompetence has meant that there is (fortunately) a
yawning gap between the president’s ugly rhetoric and what he has actually accomplished.
important for the global economy, there has been no trade war. Using the
exchange rate between Mexico and the US as a barometer, fears for the future of
the North American Free Trade Agreement have largely subsided, even as trade
negotiations have stalled. Yet the Trump roller-coaster never ends: 2018 may be
the year that the hand grenade Trump has thrown into the global economic order
point to the US stock market’s record highs as evidence of some Trumpian
economic miracle. I take it partly as evidence that the decade-long recovery
from the Great Recession is finally taking
hold. Every downturn – even the deepest – eventually comes to an end; and Trump
was lucky to be in the White House to benefit from the work of his predecessor
in setting the scene.
I also take it as evidence of market participants’ short-sightedness, owing to their
exuberance at potential tax cuts and the money that might once again flow to
Wall Street, if only the world of 2007 could be restored. They ignore what
followed in 2008 – the worst downturn in three quarters of a century – and the
deficits and growing inequality that previous tax cuts for the superrich have
give short shrift to the deglobalization risks posed by Trump’s protectionism. And
they don’t see that if Trump’s debt-financed tax cuts are enacted, the Fed will
raise interest rates, setting off a market correction.
other words, the market is once again showing its proclivity for short-term
thinking and pure greed. None of this bodes well for America’s long-term
economic performance; and it suggests that while 2018 is likely to be a better
year than 2017, there are large risks on the horizon.
a similar picture in Europe. The UK’s decision to leave the EU didn’t have the
jolting economic effect that those who opposed it anticipated, largely because
of the pound’s depreciation. But it has become increasingly clear that Prime
Minister Theresa May’s government has no clear view about how to manage the
UK’s withdrawal, or about the country’s post-Brexit relationship with the EU.
are two further potential hazards for Europe. One risk is that heavily indebted
countries, such as Italy, will find it difficult to avoid crisis once interest
rates return to more normal levels, as they inevitably will. After all, is it really
possible for the eurozone to maintain record-low rates for the foreseeable
future, even as US rates increase?
and Poland represent a more existential threat to Europe. The EU is more than just
an economic arrangement of convenience. It represents a union of countries with
a commitment to basic democratic values – the very values that the Hungarian
and Polish governments now disparage.
EU is being tested, and there are well-founded fears that it will be found
wanting. The effects of these political tests on next year’s economic
performance may be small, but the long-term risks are clear and daunting.
the other side of the world, Chinese President Xi Jinping’s Belt and Road Initiative
is changing Eurasia’s economic geography, putting China at the center, and
providing an important stimulus for region-wide growth. But China must confront
many challenges as it undergoes a complicated transition from export-led growth
to growth driven by domestic demand, from a manufacturing economy to a service-based
economy, and from a rural to an urban society. The population is aging rapidly.
Economic growth has slowed markedly. Inequality is by some accounts almost as severe as in the US, where
it is the fourth-highest in
the OECD (behind Mexico, Turkey, and Chile). And environmental degradation
poses a growing threat to human health and welfare.
unprecedented economic success over the past four decades has been partly based
on a system whereby broad consultation and consensus-building within the Communist
Party and the Chinese state underpinned each set of reforms. Will Xi’s
concentration of power work well in an economy that has grown in size and
complexity? A system of centralized command and control is incompatible with a
financial market as large and complex as China’s; at the same time, we know where
insufficiently regulated financial markets can lead an economy.
these are all essentially long-term risks. For 2018, the safe bet is that China
will manage its way, albeit with slightly slower growth.
short, as the advanced economies’ post-2008 recession fades into the distant
past, global prospects for 2018 look a little better than in 2017. The shift
from fiscal austerity to a more stimulative stance will reduce the need for
extreme monetary policies, which almost surely have had distortionary effects
not just on financial markets but also on the real economy.
the concentration of power in China, the eurozone’s failure (thus far) to reform
its flawed structure, and, most important, Trump’s contempt for the international
rule of law, his rejection of US global leadership, and the damage he has
caused to democracy’s standing all pose deeper risks. Indeed, they threaten not
just to hurt the global economy, but also to slow what, until recently, had
seemed to be an inevitable march toward greater democracy worldwide. We should
not let short-run success lull us into complacency.
Project Syndicate, 2017.