As we move into the unchartered waters of 2017, it is important to look beyond the short-term noise of financial markets and focus instead on the more prominent risks that may potentially affect the global outlook. It appears the only certainty in 2017 is uncertainty!
2016 was renowned for being the year of ‘left field’ antics, with Brexit and Trump wins rattling the cages of the most stoic and considered financial forecasting experts. What the markets won’t be able to ignore this year is the Trump presidency. After the US Elections, the non-traditional rise of ‘populism’ has impacted markets and could potentially be a source of volatility going forward. The public have spoken, citing a rebellion against ‘political correctness’ and supporting the kind of anti-establishment politics that are fuelled by economic insecurities, exacerbated by fear of immigrants stealing jobs, welfare or other taxpayer dollars. These opinions are voiced by the multitude with a conviction that their political leaders are ‘out of touch’, don’t understand or even care about their plight.
It seems the rise of populism is here to stay with communities’ rebel against the institutional elite and dis-satisfaction being the status quo. Whether this stems from a person’s fear of economic inequality or from a more complicated reaction against progressive cultural change, it seems the ‘call for change’ is in the air.
To date, this quest for change has resulted in positive spikes in global equity markets, however, in 2017, many financial institutions believe that US President-elect Trump is ‘the single largest risk to the global economy’. According to a client survey by forecasting firm Oxford Economics Limited, more than half of respondents said the probability of a sharp slowdown has increased recently. The survey reveals that 27% believe that the greatest risk to the global economy in the next two years will represent a trade war with China that could unleash Donald Trump. According to 23% of survey participants, a sharp slowdown in Chinese growth is most threatening to the global economy.
Bank of America Merrill Lynch analysts said in a recent note, ‘We can’t recall a time when a change in leadership in Washington had the potential for such large and diverging effects on the US economy”.
Aside from the obvious Trump and China impacts, other downside risks over the next few years are mainly geopolitical tensions. Russia, The Middle East and South China Sea all feature as possible contagion events to global stability as well as interest rate increases, oil and commodities prices and populism uncertainty.
According to the latest World Economic Outlook Report from the International Monetary Fund (IMF), the global economy will expand 3.1% this year and 3.4% next year. This low growth environment is widespread and quickly becoming the ‘new normal’ (global growth was as much as 5% in the lead up to the GFC) with the IMF calling for a potent and more balanced policy mix to deliver a strong path for growth and financial stability to avoid slipping into a state of financial and economic stagnation.
Only time will tell whether president-elect Donald Trump succeeds in ‘making America great again’ and smooths tensions with China. In the meantime, let’s look at the Top Three Potential Risks for the year ahead (not in any order)….
