The World in 2018: Stability or Volatility
By Daniel Silke
The global economy continues to exude a degree of confidence from both the developed to emerging markets. Synchronised growth across geographic jurisdictions has created an air of optimism for 2018 whilst equity markets continue to perform well – often reaching new heights from New York to Jakarta.
Clearly, there is a mood of exuberance in the air – and that is a welcome relief a decade after the global credit crisis. Yet there remains a core question as to whether the solid performance is sustainable or about to show signs of stagnation or even strain?
Loose monetary and financial conditions thanks to quantitative easing (QE) and low interest rates have propelled both the US, European and even developing markets. A search for yield has taken investors to far flung regions of the world and have opened up a wealth of opportunities in areas such as West and East Africa.
With the tapering and end of QE, a normalisation is now taking place. Indeed, one could argue that global GDP growth in recent years has not been about higher trade volumes – but rather related to the pumping of around $300 billion per month by the central banks of the world in the financial system.
The return to normalisation therefore looks risky. Yet, corporate earnings in both the US and Europe have been largely stellar. Clearly, a more positive operating environment had been created for corporates under the Obama administration, but promises of a massive uptick in infrastructure spend and tax reform have fuelled the belief that ‘trickle-down’ economics will be stimulatory.
Europe has also been a beneficiary of political stability since both the Dutch and French voters opted for more centrist pro-European choices in their important votes during the year. Services and manufacturing sentiment expressed in Purchasing Managers Figures (PMI) have been on the up in the EU even if they are showing some signs of stagnation in the US.
China continues to stabilise its economy through a key shift towards increasing the power of the domestic consumer along with critical advances in tech and IT. Beijing’s economy is mutating to something new in terms of sectoral shifts whilst at the same time, the ‘Belt and Road Initiative’ is the most ambitious and significant attempt to lock in large tracts of the planet to a nation’s economic pipeline since the attempt by the British to establish a ‘Cape to Cairo’ road across the African continent in the 1870s.
Prime Minister Modi will be breathing a sigh of relief in that India’s recent fall in GDP now seems to have turned the corner. The Japanese are enjoying seven consecutive quarters of growth whilst other emerging markets have lifted themselves and are set to resume positive growth. Stand-outs include Indonesia, Vietnam and the Philippines whilst the East-African corridor of Kenya, Ethiopia, Rwanda and Tanzania remain highly attractive.
So what could really go wrong? Actually, quite a bit! Political risk remains high in all regions of the world currently doing well. There is an increasing disconnect between economic growth and domestic political instability which can destabilise many of these growth markets.
The United States is set to enter a very rocky political period in which the Trump Presidency will come under closer inspection from Robert Mueller. This threatens to undermine credibility and confidence in the President and his ability to drive the Republic policy agenda.
And, with looming mid-terms in November 2018, Trump will have to show substantial economic growth – at levels exceeding 3% – to avoid becoming a lame duck to the Democrats as voter fatigue and unfulfilled promised swirl amidst the vagaries of the Trump persona.
In Europe, it is again the political risk of simmering populism that threatens to derail the European Union project. Italy will vote in 2018 and a shift to anti-EU parties can upset the project afresh. German politics is in a state of flux following the right-wing AFD’s entry into the Bundestag. Electorates in Poland and Austria continue to back very conservative administrations.
Clearly, Brexit now forms part of the risk for the broader Europe region as the UK economy struggles to adapt to the complexities of exiting from Brussels in complex and often-disagreeable negotiations.
Brexit has already taken its toll on the UK’s growth – for this year and beyond to 2021. Rising debt levels and poor retail sales confirm the strained discretionary spending power of the consumer, although domestic manufacturing is benefitting from a weaker pound and bilateral trade prospects in future.
Indeed, it is this issue of both public and private debt that remains a destabilising force in the world. Both forms of debt are near record highs in many countries from the developed to emerging worlds. Increasing bond issuances for many parts of Africa threaten to undermine growth by creating a fresh round of debtor nations.
A Chinese debt bubble is likely to be averted – but clearly any economic downturn can create added volatility. And, a more protectionist United States can begin a process of unnerving future kingmakers like China leading to barriers and related geo-political tensions.
Commodities have improved – yet they too are increasingly subject to the shifts in the Chinese economy. This puts pressure on many nations – particularly in Africa, who are over-reliant on mineral (or oil) extraction, to urgently begin diversifying their economies.
Wage growth remains tepid across the US, UK and EU markets which will continue to reflect in domestic policy discussions and voter resentment. And, migration continues to create value-based angst amongst large swathes of citizens in the richer developed world.
Ultimately, the charts look good. But they belie a soft underbelly of unresolved issues that are both complex economic problems as they are social and political. Income inequality remains unresolved almost everywhere – and the resultant destabilisation that causes will continue to create elites that derive benefit yet are fundamentally insecure in their well-being. At the same time, those that derive little benefit from record closes on the Dow or Nasdaq, will feel increasingly alienated from the political centre.
It may therefore be prudent to take a more cautious approach to the next 12 months. After all, after eight consecutive years of economic expansion, even the best laid plans can be less fruitful.
Within this context, the need for expert wealth management remains critical whatever the source jurisdiction. The stability of the present will always have an underlying fragility and will always necessitate dynamic and credible reaction to changing regulatory and socio-political circumstances.
Stability is the top-line message – but expect the unexpected, as the old cliché goes!