2017! What an incredible year. Personally, I’ve achieved several goals I set myself last year, one of which was to change career. I can positively say that I achieved this goal towards the end of 3Q. I waved goodbye to being a Quality Assurance Engineer and welcomed the opportunity to work on Brexit, as a trade policy advisor.
The sheriff of Washington
Obviously, one cannot do a who’s who of 2017 without saying that President Trump, the outlier candidate from the 2016 presidential race, is still alive and kicking. He’s experiencing a lot of fallout from his Russia connections, nepotism, and hot-headedness, but he’s still in power and has achieved a tax reform (for the rich). He’s a modern “sheriff of Nottingham”.
Scenario model this
Moving into 2018, I think Trump’s trumpeting of NATO and Europe will carry on. He’s already had an impact on NATO spending so any future development or deployment of the 70-year-old alliance will be interesting. It’s good that some members have vocalised that they will spend more. Nevertheless, as the EU becomes more assertive as the eurozone recovery gathers momentum, the bloc’s foreign policy could push Russia into a corner if it were to become more assertive and by-pass NATO. If this were to happen, unlikely under Merkel’s watch, it would prove fateful to Western Europe.
On the subject of Merkel, she is Germany’s first chancellor for a long time to enter a fourth term. Europe’s year of political reckoning never emerged: the UK GE saw Theresa May elected as PM; France has a centrist; the Netherlands didn’t see Geert Wilders take the helm; however, Austria broke the trend. And for the first time since the 1930s, Western Europe has a far-right political party sharing power. This contrasts with Xi Jinping’s historic second term which was assured after many purges over the years’.
Returning to 2018’s key geopolitical risks, clearly, the biggest publicly aware threat continues to be the DPRK, and as I said this time last year that they would never actually launch an ICBM, however, in the recent “rocket man, dotard” war of words, this could become hotter in 2018! The DPRK rightly remains a significant threat to world peace. If the world’s best negotiator can keep Russia and China on his side then maybe any military involvement might be assuaged?
Other threats to monitor are the firming of interest rates across the OECD: with the US Fed expected to rate hike several times, will the BoE’s “unreliable boyfriend” hike more than a measly 25 basis points this year? And similarly, the ECB. In all cases, QE is being curtailed (i.e. easy money to add liquidity to financial markets is being removed from circulation) and this could have a triple whammy as interest rates and inflation grip, in the case of yours truly, the UK economy.
That’s right, with the fiasco that is Brexit, coupled with the tightening of monetary policy and inflation hitting every aspect of the UK economy, in addition to another year of real wages not increasing, Britons will feel it as soon as the clock strikes 00:00 in a few hours’ time. And on the topic of Brexit, this still represents a key risk for 2018 more for the domestic economy rather than for other key international players.
Related to central bank rate hikes is the ongoing “unloved” bull market. Will 2018 see a continuation of the post-recovery stock market rally? This is a tough one to call. Firstly, this is predicated on the effect of slightly tightening monetary policy and to some extent the effect of interest rates (as borrowers will now be paying more on their loans from the good old days of QE). The only way I see the bull market correcting itself is if rate hikes move in percentages rather than basis points. Don’t forget, Trump’s Tax Plan was a smart move to help businesses weather the coming storm. Therefore, it’s plausible to conclude that the S&P and FTSE100 will continue to set new all-time highs! And as a function of this, generous dividend payouts will continue. If, however, rate hikes and the withdrawing of QE from OECD economies impact markets greater than expected, then I see a rush towards cryptocurrencies. As we exit 2017, the standard bearer for these novel assets, Bitcoin, has become more legitimised by its listing on the Chicago futures exchange. 2018 will see other bourses lend legitimacy to these exotic assets, along with Goldman establishing its first crypto desk the big investment banks see lots of upside!
The return of the ideologues
One thing the global economy needs to be cognizant of is the threat posed by extremist ideologues vis-à-vis populists and their ilk. Of course, they’re given a helping hand by wage stagnation, inflation above 2% (at least in the UK), and the Trump administrations love affair with America First (the foreign policy favouring bilateral trade deals) at odds with the EU27’s love of internationalism and trade facilitation. There you have it and in short: 2018 will likely see a continuation of 2017s late political and economic developments with enhanced political and financial volatility on the cards.