2017 was certainly a surprising year for many. The global economy’s growth surpassed the expectations of even the most optimistic forecasters. It was aided by loose financial conditions, including equity markets reaching record highs, a lower-than-expected dollar and accommodative monetary policies in many major economies, apart from the US.
In addition, there were more supportive fiscal policies, low inflation and a strong global trade. The growth was broad-based and across developed and emerging markets. The momentum is expected to continue in the New Year.
Most major financial institutions converge in their expectations that the global GDP will rise by approximately 4%, up from 3.7% in 2017. Inflation will continue its slow upward trajectory, however, remaining below expectations, according to Goldman Sachs.
If inflation increases at a higher pace, then central banks may be more hawkish than expected and increase rates faster than anticipated. JP Morgan forecasts the global CPI inflation to increase by 2.5%.
Demand-side has circled around businesses as their profits increased in the past year, leading to increases in the global CAPEX. On the supply side, global productivity has picked up as well. In many developed economies, spare capacity is decreasing quickly. In southern Europe, however, many years need to pass before full employment is reached.
Progress of the US
Undoubtedly, 2017 was the year of the United States. When Donald Trump was elected president, many economists like Paul Krugman or market participants like George Soros predicted doom and gloom, saying that the recession and the fall of the stock markets would be so huge that they would never recover.
They could not have been more wrong. The stock markets have reached their highest levels ever. The Dow Jones has had record closes 70 times during the year. Unemployment is at a 17-year low, falling below 4%, while food stamps level reached their lowest levels in almost two decades. Furthermore, consumer confidence surged to a 17-year high as well, together with homebuilder confidence and public confidence in job growth.
Moreover, the market expectations for a tax reform were more or less met, prompting the stock market growth to continue further. In the first days of 2018, the Dow reached 25,000 points for the first time. According to the Fed, US household wealth rose by $1.7trn in the second quarter of 2017. Lastly, American corporations had their best earnings session in 13 years.
The Fed is expected to hike rates four times in 2018 continuing their normalisation of monetary policy. JP Morgan predicts a tightening of 125 bp of rates and a decrease of $400bn in its balance sheet. When considered globally, the rise in rates will be limited by the increase in the balance sheet in other major economies that are continuing with their QE programs. Due to this, the dollar will likely show signs of strengthening. It is expected to increase with respect to the Indian rupee and the Australian dollar, but remain lower than the Euro and the Japanese Yen and stable with respect to the Chinese yuan.
Growth in the Eurozone
In the Eurozone, the growth of the economy was 2.6%. The recovery continues steadily, albeit slowly. The ECB is divided with regards to the end date of QE, since inflation is not at its desired level.
However, the tapering process has already started. The banks have performed well although the negative rates hurt interest income, something that is unlikely to end in 2018. Yet, they have cut costs and increased fees.
Moreover, the number of loans they have given has increased. Lending is expected to continue rising in the New Year. The ECB economists, as Wall Street Journal reports, predict Eurozone economic growth for 2018 to be 2.3%, rates to remain unchanged and the ECB to continue buying bonds, although at a reduced rate of €30bn.
According to Bloomberg, confidence in the Euro area at the end of 2017 reached a two-decade high. The Euro-area economic confidence measure reached 116, above the median forecast 114.8 in a Bloomberg survey.
It has to be said that, in 2017, the turbulence in the Eurozone has not been economic or financial, but rather of a geopolitical nature. The crisis in Catalonia, Brexit negotiations and political elections coupled with a populist tide meant to shake-up the status quo has been a cause for distress that has, naturally, affected the stock markets.
All these are not one-time issues, but are likely to continue and persist in 2018 too. Will the stock markets be substantially affected by them, or have they developed an immunity to political troubles like in the US? This remains to be seen.
With respect to oil, it is expected to average $60/bbl, 10% higher than the 2017 average prices. The higher prices are due to higher global demand, supply restrictions in the energy market, hurricane-related stoppages in the US and financial disruptions in Venezuela among other factors. It is very likely that OPEC will extend the cuts of oil supply through mid-2019, helping keep the oil prices to these levels.
The expectations for 2018 are undoubtedly high. If it continues on the same path that it started, it may well be the best year in a very long time.
BP and Iraq Sign Development Deal for Kirkuk Oil Fields
Iraqi Government and British energy giant BP have signed an agreement for the future development of the Kirkuk oil fields in Northern Iraq.
A statement on the Iraqi Oil Ministry’s website said the “memorandum of understanding” between the government and the London-based oil company would enable further development of the oil fields as well as “to open a new page of work” for the North Oil Company, a subsidiary of the Oil Ministry, on “solid foundations”.
BP Director, Michael Townsend, said the company would conduct the necessary surveys and prepare the required statistics. He claims the company will increase production by 750,000 barrels of oil a day.
The Kirkuk Oil Field, discovered in 1927, is one of the largest oil fields in the world, producing half of Iraq’s oil exports, a reported million barrels a day. However, it has also been a wellspring for local instability: the fields had been seized in 2014 by the Kurdistan Regional Government, who piped oil across the Turkish border, a few hundred kilometres to the north. The fields were only retaken by government forces in October 2017.
Baghdad is attempting to reassert its authority throughout its provinces and according to Iraq’s Minister for Oil, Jahbar Ali al-Allaibi, Thursday’s announcement will “speed up the rehabilitation process”.
During the Saddam Hussein era, the fields suffered irrecoverable damage due to poor management. Excess production was reinjected back into the ground making Kirkuk’s oil thicker and therefore harder to extract.
On Wednesday al-Allaibi met with Britain’s ambassador, John Wilkes, where according to the ministry’s website, they talked about joint cooperation between the two countries in the oil and gas industry.
Trump’s Presidency and Russian Relationship: The Future
Much has been contested about Donald J. Trump’s love affair with Russia. Questions deserve a thorough and honest investigation. As distasteful and risky it may be, the best outcome of the enquiry is accusations continue to swirl, Trump limps through three more years, and in 2020, he is crushed at the ballot box. The world moves on. If removed from office, odds are Trump whips his base into a frenzy. Only the height and duration of civil unrest is in question. A worse case is that Trump emerges emboldened, eager to settle Putin’s longstanding challenge.
Putin Mocks Trump
The competition is real. Putin’s economic and political dominance gnaws Trump. Putin knows this. So, he taunts the President and dares Trump to employ the same ruthless tactics he exploited to consolidate power and possibly become the world’s richest man. Since Trump only sees green, he took the bait. The race is on to be the world’s first trillionaire.
Russia’s population is 142 million. Its $3.86trn translates into a measly $26,900 per capita GDP. In contrast, the 326 million people of the United States generate $18.62trn in GDP, nearly five times Russia’s total. The US per capita GDP of $57,600 more than doubles Russia’s. Despite Russia’s meek economy and reports that Putin has embezzled up to $200bn in assets, Putin remains incredibly popular in Russia.
The apathy regarding this unparalleled heist makes Trump and Putin salivate over what they could jointly pilfer from the world economy. To advance their contest, the pair will identify a common threat. US-Russia relations will warm. Under the guise of “Peace through strength,” Russian sanctions will be lifted, and the Magnitsky Act repealed.
The administrative state in retreat, animal spirits will run wild. Trump’s name will be emblazoned across the globe. Countries desperate for jobs will be compelled to forge deals sponsored by Putin and Trump. Ethics be damned, the race to the bottom of the $120trn global economy will prompt a wave of corruption never seen before. Every facet of human decency will be compromised: environmental regulations, free and fair-trade by-laws, intellectual property, and human rights protections. The collusion is real.
In time, complicity will turn to double-crossing. It’s the Trump-Putin way. Makeshift “me-first” trade deals will collapse. Boycotts, divestitures and sanctions will be commonplace. Cooperation will evaporate. New political boundaries will be drawn with little world condemnation.
It doesn’t have to happen this way. Patience is a virtue. The checks and balances of the three branches of government are powerful mechanisms to thwart overt corruption.
Yet, for the impatient who seek Trump’s impeachment or removal via the 25th Amendment, be careful what you wish for. Only Trump can tame his army. To assume Trump will plead mercy at the feet of the administrative state contradicts Trump’s lifelong persona. He will relentlessly counterpunch and encourage his followers to do likewise. The short and long-term political and social risks are astronomical.
If Trump stems the tide, consolidates power and aggressively partakes in Putin’s race for two terms, the risks outstrip his forced removal. The consequences will be multi-generational.
Rope-a-Dope is the Key to Containing Trump
The only path that possibly prevents extensive collateral damage is to check Trump into policy oblivion. Legislators must play rope-a-dope for as long as it takes, even three years if necessary. If Democrats take back both houses in 2018, the tactic will not set up Trump and his base for a final knock-out punch in 2020. For that to occur, numerous members of the GOP must join the effort. They too must throw periodic jabs at Trump then absorb a barrage Trump’s counterpunches.
With foes in every corner, even Trump – the self-proclaimed greatest counterpuncher in history—and his base will wear themselves out well before 2020. Then the decisive knockout punch can be delivered at the ballot box—without collateral damage.
Trump is severely wounded. If he gracefully and peacefully surrenders the Presidency, great. But don’t expect it. Rope-a-dope deployed by both parties is the countries best hope for a peaceful end to the Trump Presidency. Any other scenario risks the once unthinkable; an ‘American Spring’.
May Meets Macron
The UK prime minister agreed to pay £44.5m towards tighter border security at Calais.
Editor’s Remarks: The French president arrived in the UK for the Anglo-French summit amid widespread complaints from the Tory party about just why Britain is paying another £44.5m for tighter security in France. One Tory MP pointed out that this addition brings the total figure the UK has paid to France in recent years up to £170m. France, meanwhile, says that the amount is necessary because the migrants in Calais are trying to get to the UK, who must, therefore, contribute towards their costs. The talks were also consumed by the imminent task of reaching consensus over the UK’s trade deal with the UK after Brexit goes through.
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