From bitcoin to Brexit, expect the unexpected this year in global economics

Whether the world still has similar momentum a year from now is something else, and the single most likely thing to check it will be a fall in asset prices

Bitcoin is the result of global central-bank policies of printing more and more cash (Reuters)

If 18 months ago your crystal ball had shown you, in January 2018, that Britain was set to leave the EU and Donald Trump would be President of the US, I don’t think you would have believed its further prediction that shares would start 2018 at an all-time high. Add in the tensions with North Korea, and you might have been even more dubious. So how to explain it?

There is a simple answer: that politics don’t matter much, whereas money matters a great deal. In other words, as long as there is no global disaster whoever happens to be US President is not important in global terms. As for the spat between one member of a European trading bloc and the rest, that is less important still. What does matter is that the world’s central banks have printed shed-loads of money, and that had to go somewhere. Shares are one of the places where the cash has gone.

Simple, and I have quite a lot of sympathy with that. The US had had some pretty rum political leaders in the past but what matters is its technical dominance. Who else could create an Apple, a Google and a Facebook? As for Brexit, there will some sort of deal because that is what the politicians and bureaucrats are paid to do.

The trouble is, this does not tell us much about what might happen next in the world of economics and finance. Indeed there are two sharply different views. Both start from the same place, in that they accept that ultra-easy money policies have succeeded in creating a global recovery. But one, the optimistic view, believes that this recovery can continue for a long time, several years, because current inflation will remain low. Gradually interest rates will rise but only slowly. It accepts that there is an economic cycle but sees the next downturn as years away. Meanwhile, it thinks share and property prices will continue to reflect these solid economic prospects.

The other view is that the central banks have created a financial bubble that will at some stage burst. The surge in the price of unconventional assets, notably the cybercurrencies, shows how if you spray the world with cheap money for long enough even normally sensible people go slightly bonkers. So there will be a financial crash. They would acknowledge, of course, that they just don’t know when that will happen or how serious the consequences will be.

That is the background to this year. We in the UK will be preoccupied with Brexit, but this is not important in global terms. What matters is the durability of the recovery, and the things – such as an asset-price crash – that might unseat it. Here are two thoughts about this that might be helpful.

One is that momentum matters in economics. Once an economy is growing solidly it takes quite a lot to unseat it, just as when it is flat on its back it takes a lot to get it going again. Global growth last year was the highest for a decade, so it would be most unlikely for there to be a collapse in demand in 2018. That is good news for all, including the UK, for usually the developed world economies move pretty much together. (The eurozone’s second recession was an outlier.)

Whether the world still has similar momentum a year from now is something else, and the single most likely thing to check it will be a fall in asset prices.

That leads to the second thought. Some asset prices don’t matter to the economy, while others do. For example if the gold price falls, that has zero impact on overall economic demand. Property prices do matter, but property is such a segmented market that is hard to predict its impact. Things go wrong when too much money has been lent to property companies, or in loans secured against property, but given the role of property in the 2008 crash I can’t see it unseating things this time.

Now look at three other asset classes. If there were a sharp fall in equities that would damage growth, but it would have to be huge to provoke a recession in the main economies. All adults know there will, some time, be another share-price crash. But a “correction”, a nice word for a mini-crash, need not do too much damage.

Bond prices matter more. They move mathematically in the opposite direction to long-term interest rates and we all know that rates are on the up. But many investors, such as pension funds and banks, are compelled by regulation to hold bonds. So an unexpectedly sharp fall would damage the financial system as well as losing investors’ money. I think that is a real threat.

Finally, unconventional assets. What happens to bitcoin and the rest should not matter. If all the cryptocurrencies were seen to be worth zero (as I think they probably are) a lot of people would have sore heads. It would be bad news for money launderers, but I can’t see how this destroys the world economy. But maybe that is too optimistic. Maybe there are links that no one yet can see.

Of one thing we can be sure. This will be a fascinating year at all sorts of levels, but if come January 2019 the world economy has carried on growing at a decent clip, then we will mostly end up a bit better off than we began.