What will be the most profound influence on the global economy in 2017? The answer is likely to be Donald J Trump.
Since the Second World War the United States has underpinned the global economy with a cast-iron commitment to liberal trade and the military security of the free world. The dollar has been the blood in the veins of international commerce. American sovereign debt has been the ultimate safe asset for investors, the sun at the heart of the financial galaxy.
But now with November’s election to the White House of a former reality TV personality with no political experience the stability of that entire system is, for the first time in 70 years, in question.
The International Monetary Fund has forecast global economic growth to pick up to a still lacklustre 3.4 per cent growth next year, from 3.1 per cent in 2016. The OECD thinks there will be a 3.3 per cent global GDP expansion. The World Trade Organisation has projected disappointing global trade growth of between 1.8 per cent and 3.1 per cent. Yet the value of such forecasts is even lower than usual given the inordinate uncertainty around what Trump will do when he enters the White House at the end of January.
Trump, lest we forget, ran a campaign of destructive economic nativism. He said he was prepared to tear up trade agreements and start trade wars, that he would force America’s allies in Asia and elsewhere to pay for their own military protection. He even spoke casually, at one point, about possibly defaulting on America’s sovereign debt.
If he delivered on even a portion of that manifesto the world economy would experience a profound negative shock, comparable to the last great retreat of globalisation in the 1930s.
So will Trump’s bite be as savage as his bark? The simple answer is that we cannot know. Since his victory, Trump has re-committed to pulling out of the major Asian free trade agreement known as the Trans Pacific Partnership on his first day in office. He has also tweeted a threat of 35 per cent taxes on US companies that move jobs offshore.
But other campaign promises on trade – such as labelling China a currency manipulator – have not been explicitly mentioned since the election.
On defence, Trump has said nothing lately about Nato, although his decision to take a phone call from the president of Taiwan, overturning 40 years of US diplomatic protocol, was hardly a comforting signal of “business as usual” for America’s allies.
At the moment, the world’s governments and multinational corporations are keeping calm and carrying on. US stock market valuations are swelling, with investors apparently betting that Trump will deliver on his massive tax cut promises.
Analysts are focusing on more tractable economic questions such as when the US Federal Reserve is likely to put up interest rates again, the implications of the rising value of the dollar and the size of Trump’s promised infrastructure stimulus. But the hard reality is that such issues will prove to be mere details if Trump collapses the roof of the temple of global trade and security. The chances are that he will not, given that he seems to be relying heavily on the very corporate lobbyists he promised to purge during his campaign, groups that have a vested interest in the status quo. But it would be rash to rule it out. And in all likelihood Trump himself probably doesn’t yet know what he will do when he enters the White House.
American political uncertainty is the world’s economic problem. But not everyone thinks so.
Here in Britain some Brexiteers have been talking enthusiastically about the Trump election because he has previously said positive things about a new UK-US trade deal – unlike Barack Obama, who warned that Britain would find itself at the “back of the queue” after leaving the European Union.
Yet even if such hopes do turn out to be more than wishful thinking, nothing will happen in 2017. First, Brexit itself has to be negotiated. Talks between Theresa May and her European counterparts will kick off in March when Article 50 is invoked (presuming the courts and Parliament don’t upset the timetable).
The Office for Budget Responsibility, the Treasury’s independent forecaster, expects this to coincide with a serious slowdown in the UK economy as higher inflation, stemming from the collapse in sterling, pulls the rug from under consumers and businesses cut back on investment in the face of the yawning uncertainty about how we will trade with the rest of Europe after 2019. The unemployment rate is expected to creep up from its current lows.
If this slowdown is worse than expected, it may prompt another cut in interest rates from the Bank of England. On the other hand, if inflation jumps more than anticipated and expectations of prices rises become embedded the Bank may have to put rates up.
As for the rest of the world, the familiar suite of economic reform challenges, and the related perils, continue. China will grapple with its stop-start shift to consumption-led growth while trying to stabilise the currency and slow the growth of its corporate debt mountain. Japan’s agonising quest for sustained positive inflation will stretch on. Brazil is desperately hoping for modest growth after a brutal slump and a crippling political corruption scandal. The fate of the commodity-exporting emerging-market economies of Africa and South America will largely hinge on developments in the resource-hungry giant Chinese economy.
The newly agreed Opec production cut could send the global price of energy higher, helping the Gulf states and Russia (although if Trump delivers on his pledges of copious support for domestic US energy producers new supply may well continue to outstrip demand).
Old Europe looks set to face very mediocre growth and still subdued inflation, which is why the European Central Bank will almost certainly keep its monetary stimulus programme in place for the full year, especially with populist threats still growing in core countries, including Italy and Germany.
Indeed, Europe will also be the scene of the most important elections of 2017. The French presidential poll will be held May. If Marine Le Pen of the anti-EU, anti-euro, rabidly anti-immigrant Front National wins the keys to the Élysée Palace (an outside chance but not an impossibility) that could well lead to the disintegration of the single currency and even the EU. The fall of France to the far right: the one event in 2017 that could trump Trump in economic significance.
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