While many will have breathed a sigh of relief on the 1st of January that 2016 is over, the consequences of last year will continue to define this one. Firstly, we shall see what effect the far right electoral successes and Russian electoral interference in 2016 will have on European general elections. Alongside these events we will also receive further details on Mrs May’s plan for the Brexit negotiations in March, and by the mid-year, we will know whether the “Trump boost” which has lifted global equity markets and triggered a selloff in fixed income assets, will have been justified.
But 2017 is likely to be a tale of two halves. Political paralysis in the USA and Europe has hindered economic growth and encouraged extremely cautious investment strategies. Thus, the consequences of the political choices which Europe and the incoming Trump administration will have to make in early 2017, will provide markets, businesses and other stakeholders with a clearer sense of travel for the world’s largest consumer economies. The second half of the year will then revolve around how the rest of the world responds to these decisions.
If confidence in the economic growth of the US economy continues to rise, and subsequently leads to the projected three rate hikes by the Fed, then the US dollar will continue to appreciate, causing a flight of capital out of European and Emerging Market asset classes (whether they be equities or fixed income). This will cripple companies in the developing world who have large US dollar denominated debt, even if governments in regions like Asia will be better insulated from the effects this time than during the Asian Financial crisis in 1997. Moreover, if the dollar appreciation leads to a widening of the US trade deficit, as witnessed during the Reagan years in the 1980’s, we would expect to see greater emphasis on an “America First” trade policy. The rhetoric and responses to President Elect Trump’s tweets on Trade, already indicate that this may be the course of action.
Though these comments may seem overly financial, their wider societal implications are enormous. If investors see greater returns in US markets, alongside greater political instability in other global markets, then access to finance will become constrained across the developing (and perhaps even developed) world. This comes at a time when global investment in infrastructure remains well below the estimated requirements by the world’s leading international financial institutions, such as the World Bank, ADB, African Development Bank and Inter-American Development Bank. To put figures to this effect, it is estimated that Asia needs to spend between US $2-3 trillion a year on infrastructure. The figure to date is roughly US $1trn, or 50% of that required. Elsewhere in the world, notable Africa, the figure is even lower. Such infrastructure includes basic goods such as hospitals, schools, roads and power generation assets. Without the ability of governments to finance and provide these goods, then societal frustrations with consistently poor living standards may lead to greater political unrest and support for populist parties. This is especially concerning in countries that are still experiencing large population booms and who have a growing, young population that need economic growth to find jobs.
Moreover, as the value of the US dollar rises, oil producers who have operational costs in domestic currencies, will see increased financial returns. This will help alleviate some pressure on the balance sheets of oil dependant governments, but it will also increase the real cost of oil for citizens and businesses in emerging and developed markets (oil globally is priced in dollars, so a rise in the dollar v.s. other currencies will increase the cost of fuel for consumers).
Looking beyond the potential areas of concern, there are areas where optimism is warranted. In 2016 investment in Renewable Energy overtook investment in fossil fuel based power generation for the first time since the start of the industrial revolution. In 2017 this trend will only accelerate. The UAE has already committed, in the first week of 2017, to spending US $163bn to provide 50% of its power from Renewables by 2050. Others will continue to follow. Moreover, electric car growth will continue to expand, fuelled by government incentive schemes and the launch of several new car models, such as the newest Tesla vehicles, directly targeted at middle income families and competitively priced (though government subsidy support will still remain crucial). In science, we may also see a breakthrough cancer drug brought into final stages by AstraZeneca by the end of 2017, as well as several major space launches and satellite passes of earths neighbours in our solar system.
As a student studying the world from an ivory tower in Washington DC it is easy to get lost in the noise of the world. But the one prediction for 2017 that I can make with certainty is not a macro level prediction, it is a micro one. Despite all the concerns and hysteria that the press will cover in the next year I remain convinced that the vast majority of people in the world will experience few changes to their daily lives as a direct consequence of the headline grabbing events. In fact, the biggest question in 2017 is whether despite all these huge events occurring around us, people will become more engaged politically at all.
In November 2016 I had the privilege to stand outside the White House after the election results had arrived. In a large student city, which voted overwhelmingly Democrat, in an election where Trump was (and is) described as a threat to the very nature of the American political system itself, there were more journalists present than protestors. Nor did DC see many protestors or rallies of significant size in the weeks after the result. In the UK too, after Brexit the protests were few (if any) and the rallies were poorly attended (if held). All this in a country where 1 million people marched to prevent fox hunting from being banned in 2005. Thus one question for 2017, that I hope to see answered, is whether this year of change is also a year of political awakening for the generations of citizens who have been sleeping for the last two decades.
Time will tell!