Wrapping up 2017

Given the volume of news in 2017, finding a common theme to make sense of the noise has proven challenging. However, as we start 2018, there is an argument to say that 2017 was defined by the actions of the world’s Central Banks.

After years of unconventional monetary policy, the actions of the Federal Reserve, the Bank of Japan, the Bank of England, and the EBC have begun to deliver results. The spectre of deflation has been defeated and inflation appears to be increasing across the world’s major developed economies. Economic growth has picked up in the Eurozone and Japan, while emerging markets have survived the first few US interest rate hikes without causing a collapse. But just as the achievements of these policies have been recognised, so have the costs.

As central bankers discouraged saving by reducing interest rates close to zero, investors were forced into equities and real assets. This led to a surge in global property prices and record levels of investment in global start-ups, crypto-currencies, and passive indexes. Rising property prices have led to bans on second homes across developed economies from New Zealand to Western Canada, and clamouring calls for a ban in London. In many developed economies, the average property price is now well beyond the 4x annual salary against which banks will provide loans, forcing a greater proportion of people to rent than ever before.

The hunt for yield has also played an essential role in the financing of the new economic giants that dominated news headlines in 2017: the FANGS (Facebook, Amazon, Netflix, Google, and Salesforce) being the most notorious. The perfect combination of ultra-low interest rates, subdued consumer demand and a psychological willingness to believe in the new technological era has encouraged investors to support “revenue over net profit” business models. The FANGS now represent five of the world’s most valuable companies; yet in over ten years only two have recorded net profits in their annual reports. Even more dramatic has been the explosion of Uber, Lyft, and AirBnB, whose valuations now exceed $100bn but who have never generated a profit.

Many of these themes were apparent in 2016, but their significance was not fully appreciated by politicians. As a result, the continuation of these economic distortions in 2017 was essential in highlighting the driving political crisis of the year, that of public outrage over growing economic inequality. As a consequence, 2017 represented a break in the conventional political wisdom that a government which achieves economic growth can offset these incentives against social and domestic challenges.

Even with a raging equities market, record low levels of unemployment, and signs of growing wage inflation, the US welcomed 2017 with the arrival of the most populist President in living memory. Similarly, the Conservative party in the UK ushered in the New Year with one of the strongest economies in the G7, only to lose its majority in Parliament following a snap election in June.  European voters showed that immigration was frequently a more significant issue for voters than headline economic numbers. In Germany, the bed-rock and engine of the Eurozone, the governing grand coalition hit record low polling numbers in the Bundestag elections, as the AfD entered the federal government for the first time. Meanwhile, France closely avoided electing the outwardly racist Front National. Austria elected a far-right party to government for the first time since the 1930s, where the party took the cabinet posts for the Ministry of Interior, Defence and Foreign Affairs.

The marker of success for 2018 will therefore be to generate broadly spread economic growth that benefits all within society. In that vein politicians of the political right are likely to find themselves in need of an alternative narrative. The appeal of socialism across western worlds, whether in the Jeremy Corbyn style, the Bernie Sanders variety or the Mélenchon school, will never be stronger. Finding an alternative slogan to challenge, ‘for the many, not the few’ will be an important starting point.

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