The year 2019 finished on a relatively positive note. Hope for a return to global growth has been revived; trade tensions are subsiding. But this improvement, for Mohamed el-Erian, will not endure. Microeconomic and geopolitical uncertainties are such that, in the next five years, a prolonged and growing breakdown of international economic and financial relations is poised to take root. A deglobalization for which nobody, especially the markets, is prepared.
How can political decision-makers and investors anticipate what is to come in 2020? The year 2019 finished on a relatively high note. Hope was restored for the recovery of global growth, trade tensions diminished, and central banks reaffirmed their intention to maintain low interest rates by continuing to provide massive liquidity. Financial volatility is currently under control, and there are good reasons to believe in high yields for investors in many asset classes.
The Disengagement of the United States
But as tempting as it is to be satisfied with current financial and macroeconomic conditions, we must be careful not to disregard a key element of future perspectives. There is indeed a curious contrast between the relative clarity of short-term expectations and the haziness that emerges when the horizon is extended to a period of, say, five years.
Many countries are today confronted with structural uncertainties. Over the course of the next five years, the European Union, for example, will endeavor to establish a new working relationship with the United Kingdom, all while having to manage the negative social and political effects of slow and insufficiently inclusive growth. The EU will have to navigate the rough waters of a prolonged period of negative interest rates, while striving to consolidate its economic and financial heart. As long as the architecture of the eurozone remains incomplete, the risk of instability will endure.
Moreover, over the course of the next years, the United States, which considerably outperforms most other economies, will decide whether or not it intends to continue its disengagement from the rest of the world – a process in contradiction with America’s historical position at the center of the global economy.
Avoiding an Open Confrontation
As for China, its large-scale utilization of short-term stimulus measures stands in contradiction to the longer-term reforms that the country needs. And its geopolitical ambitions, along with its regional economic and financial engagements (including the Belt and Road Initiatives) are becoming more and more costly. More important still, over the next five years China and the United States, the two greatest economic powers on the planet, will have to walk an increasingly narrow path to secure their own interests while avoiding an open confrontation.
The macroeconomic and geopolitical uncertainties of today are bound to amplify doubts that are fed by technological breakthroughs, climate change and demographics. These medium-term structural trends could lay the foundation for a political and social fragmentation even more pronounced than that which we observe today and bring about the specter of deglobalization. If there is something for which the world economy is not equipped, it is a prolonged and growing breakdown of international economic and financial relations. If such a paradigm were to materialize, current trade, monetary and investment-related tensions would intensify and spread to the realms of national security and geopolitics.
This terrible fate can still be avoided (at least for now). We can still escape it by promoting stronger and more inclusive growth, reestablishing true financial stability and creating a more just and more credible (though free) system of trade, investment and policy coordination at an international level.
Current Political Paralysis
Nevertheless, much will depend on policy workings in the very near future. Concerns about a global recession are fading, financial conditions are currently ultra-accommodating and trade tensions between the United States and China are deescalating. But these favorable conditions will not last forever.
Unfortunately, political momentum that would improve and clarify the medium-term outlook seems unlikely. The United States is headed into a tense and divisive election year. Germany, Italy and Spain are each undergoing difficult political transitions. The EU must cope with Brexit, as well as with other regional divisions. As for China, its government is endeavoring to consolidate its power amid declining growth and unwavering protests in Hong Kong. Ignored by too many of the markets’ actors, the primary concern is this: Over the course of the next five years, it is not impossible that a deterioration of economic conditions and world markets to the point of crisis will be necessary for national, regional and multilateral political systems to finally develop an adequate response.
I hope I am wrong about the current political paralysis. As long as there is still time, there is still a hope that political decision-makers will follow the wise advice of Christine Lagarde, then-director of the International Monetary Fund, in October 2017: “The time to repair the roof is when the sun is shining.”
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