Abstract: What are the scenarios for 2017, and the years ahead?
A big lesson I learned from 2016 is that you must look at the most extreme consequences of the flags you have identified as changing the global game. This rule particularly applies when the flags serve to reinforce one another.
As I said in Flagwatching in November 2015: "You will see further on in the book a flag covering the enormous increase in migrants and refugees flowing across borders into the more advanced economies. This is linked to the flag around religious conflict and increasing economic inequality in the world."
Together with the anti-establishment flag also mentioned in the book and representing the hostility of ordinary citizens against the political elite in Whitehall and Washington, the combined influence of the three flags produced the shock of Brexit and the election of President Donald Trump.
Sometimes the future defies all expert predictions, which is why you have to stick to flags, scenarios and probabilities covering a variety of potential futures. So what does 2017 and the years beyond hold in store in terms of possible highs and lows for the global economy? Click on the image to see the scenario gameboard which appeared in the book and which Chantell Ilbury and I have used in our recent presentations to encourage people to think like foxes.
On the left of the horizontal axis is a 'U' denoting a long economic slog of at least five to 10 years before the world experiences a sustainable recovery. On the right is a 'V' where the recovery takes place much sooner in the remainder of this decade. On the upper part of the vertical axis is a world operating as one unit and, on account of globalisation, sharing a common destiny. At the bottom is a world that is becoming increasingly divided because of differing economic prospects, rising political tensions, creeping protectionism and regional strife.
Starting with the top left-hand quadrant and looking ahead for five years, 'Hard Times' is where the global growth rate does not meet expectations. Virtually zero interest rates prevail as central bankers continue their attempt to convert the mild recovery since 2008 into a full-blooded one but much to their disappointment the economic pathway remains woefully flat. This applies particularly to Europe and Japan where the grey flag of an ageing and in some cases declining population overrides any stimulus measures.
'New Balls Please', to the right in the upper half, takes its name from Wimbledon where the umpire calls for new balls during each tennis match. The title indicates that if the world is going to move onto a much higher plateau of economic growth, then the game requires new balls in the form of new technologies that create entirely new industries. For example, much cheaper solar energy could lead the charge.
'Ultraviolet' (or 'UV' for short) in the bottom right-hand quadrant presents a mixed picture: the 'U' of countries still stuck in the mire of zero to low economic growth; and the 'V' of countries whose economies are taking off towards the new boom of New Balls Please. This all happens against a backdrop of the increasing polarisation of nations into competing camps.
The last scenario on the bottom left-hand side is 'Forked Lightning'. This is a double-dip scenario, namely a repeat of the 2008 financial meltdown caused perhaps by a drop in international trade as countries become more protective of their own economies. Another reason could be major defaults on debt occurring simultaneously around the world, rendering it as worthless as US sub-prime mortgages were in the 2008 crash. It should not be forgotten that the Wall Street Crash of 1929 was followed by another stock market crash in 1932. In other words, the Great Recession of the last decade becomes The Great Depression of the next one.
My current take on the global economy is that we have moved south on the gameboard into a more divided world. Not only is there potential friction now between the world's two largest economies - America and China - as a result of Trump's proposal to put tariffs on Chinese imports as well as penalising American companies which construct plants outside of the country's borders; but America is probably more internally divided than at any time in recent history. Moreover, Britain leaving the European Union is creating considerable uncertainty across the ocean.
Hence, the two scenarios in play are Ultraviolet or Forked Lightning. The flags to watch are Trump's first 100 days in office and the response to his moves by the Chinese. If Trump plays his hand in a pragmatic way, then America, China and the well-governed countries in the developing world will have a 'V' of sorts, leaving the ageing countries of Europe and Japan in their wake. The bullish behaviour of stock markets in the last few weeks suggests that investors are betting on this positive outcome.
On the other hand, if Trump goes too far in putting American interests first, then he may well trigger a downward spiral that undoes all the benefits of globalisation. Lightning begins to appear on the horizon. I am not as confident as the markets that this scenario will not materialise since his first days in office have only revealed his total determination to carry out his election pledges in full. No compromise. Witness his proposed 20% tariff on Mexican imports to pay for the wall; and the cutting-off of federal funding for US cities acting as sanctuaries for illegal immigrants.
Hence, while the markets may give the UV scenario a 90% probability and Forked Lightning 10%, I am more like a 60/40 split. I hope my extra pessimism is proved wrong. We must also not discount the idea of a new technological wave starting a worldwide boom associated with the top right-hand corner of the gameboard. We can ascend the ladder once again.
Please note that I have not covered any military conflict in this analysis. While appearing to be more accommodating to Russia, Trump has come out with some fairly tough statements on the military ambitions of China, Iran and North Korea. The flags of war have to be watched as well.
By Clem Sunter; originally published on News24, 27 January 2017