The beginning of the year is the best time to reflect on what took place the past year and prepare for the future. Here are 5 lessons from 2017 and 5 big ticket items for 2018.
First, what did we learn in 2017?
The entire world grew in sync and rejuvenated global trade. 2017 was marked by a rare synchronization of economic cycles across the US, Europe and China, pushing the world economy above 3% growth for the first time in 7 years. Global trade accelerated to 4.3%, in spite of the protectionist rhetoric.
Where did inflation go? The absence of inflation in a late and favorable phase of the global cycle puzzled central bankers across the world. New technologies and consumer habits cannot explain it all.
Heightened political risk is not enough to derail it all. The uncanny presidency of Donald Trump and tensions in the Korean Peninsula and in the Gulf did not prevent financial markets and multinationals from having a great year.
One-size-fits-all economic policy is over. Solo moves by the United States including on taxes, along with atypical policy-making (entrepreneurial states, heterodox monetary policies e.g.) from China to Turkey and Russia, confirm that the Washington Consensus is over.
There is still a lot of cash available. 7 trillion dollars on corporate balance sheets alone to be exact. This unprecedented amount of wealth – and it is true for households too – could still be put to use.
What should we expect in 2018?
The world economy could be even stronger. The US and the emerging world (outside China) should accelerate. China will continue to surprise, and Europe should be strengthened by an institutional breakthrough.
Financial conditions to remain supportive. Though all central banks will continue to unwind, tighten and enact further macro prudential policies, the private sector should continue to benefit from the credit cycle. Even with a bit more inflation (and moderate second round effects on wages), a weak dollar is a big plus.
Political turbulences should continue. From South America, through Thailand, Malaysia, and to Italy and Russia, this will be another busy year, especially as the UK and the US can surprise any minute.
Mind the disappointment factor. The biggest risk is to be disappointed, especially for financial markets, in a context of stretched valuations and market complacency. Policy blind spots (US debt, Europe’s tight window for action, China’s soft landing) combined with too much confidence could end up in higher volatility.
Brace yourselves: It might not be a walk in the park. The almost certain deceleration of the US and the subsequent release of pressure points (multiple bubble-like phenomena in financial markets, shadow banking risks, large countries avoiding structural reforms) are among the reasons for caution – and a correction.
Enjoy another year of audacity and successes, but don’t forget to fasten your seat belt!
