Macro: Twenty-Eighteen

Resiliency

This past year turned out to be quite a bit better than many had feared. The populist-nationalist wave did not sweep across Europe. It was a key risk a year ago, after the UK referendum and the US election, and spurred underperformance by the eurozone. The US exited the multilateral Trans-Pacific Partnership (TPP) that had been years in the making, and also the Paris Agreement. The broadly liberal trade regime, however, and some evidence that a global community persists, even without the leadership of the world’s largest economy, speaks to the resiliency of the institutional arrangements.  

Most of the other parties to the TPP are continuing to pursue an agreement. To be sure, America’s presence is missed. One of the first components dropped upon the US exit were worker protections. There were other efforts on trade, like the EU and Canada free-trade deal and the EU’s trade agreement with Japan, struck at the end of the year.  The Paris Agreement was a voluntary, coordinated effort to address greenhouse emissions. It appears concern has reached sufficient levels that a few state governments – including the most populous state, California – and more than 50 cities committed to adhering to the Paris Agreement standards despite the federal government’s rejection of the accord. 

Many of the potentially disruptive actions that were previously suggested by then-candidate Trump have notbeen implemented. China has not been cited as a currency manipulator, nor has the US put a punitive tariff on Chinese imports. The Trump administration has not pulled out of NAFTA, agreeing instead to extend negotiations into next year. 

After the Great Financial Crisis, global trade slowed, and with the rise of nationalism, many feared that globalization was unwinding. Global trade accelerated in 2017 as world growth increased. Indeed, for the first time since the Great Financial Crisis, trade appears to have grown faster than world growth.  There is a synchronized global upswing that appears set to continue well into next year.  Even the laggards in Europe, such as Italy and France, let alone Greece, are enjoying improving growth and falling unemployment.  

This is not to ignore potential flashpoints, like North Korea, Venezuela, Afghanistan, and the Middle East. Resiliency is not without limit. The US has an investigation into steel and aluminum on national security grounds.  Some of the US demands in the NAFTA negotiations seem almost designed to extend beyond what Canada or Mexico can agree to. The migration into Europe has shifted from eastern routes to more dangerous courses through the Mediterranean, and immigration remains a divisive issue in Europe and the US.  

Italy’s election, likely in early March, may rekindle political anxiety in Europe. The US primaries in the first part of next year will set the stage for mid-term elections in the middle of Q4. Trump is not the only leader whose domestic support is weak. May lost a parliamentary majority, and the bookmakers have her odds of surviving as UK prime minister at 50/50. Spain and Ireland have minority governments. Macron lost favor shortly after his election in May, though he has begun recovering as France is fully participating in the European economic expansion. Merkel’s CDU/CSU drew the least amount of public support in modern times, and she is struggling to cobble together a new coalition, three months after the election. Yet there is little evidence that the political uncertainties are having a negative impact on growth.

Continuity: The Powell Fed

Monetary policy among the major industrialized countries will continue to diverge in the year ahead, which is to say that short-term interest rates will likely continue to widen in the US favor. The Federal Reserve is both raising interest rates and allowing its balance sheet to shrink. It continues to anticipate that three rate hikes will likely be appropriate in 2018, as they were in 2017, followed by an additional two in 2019 and one in 2020. In H1 2018, the Fed’s balance sheet will shrink by $150 bln, and in H2 the pace picks up to $270 bln.