EconVue Spotlight | 2018 EconVue Predictions

posted by Lyric Hughes Hale on January 1, 2018 - 12:00am

Every year we ask our EconVue contributors to prognosticate about the coming year. Although many people value economics as a way to forecast the future, most economists are historians rather than visionaries. However, if one understands current trends and events, then it is possible to make some educated guesses about the future. At the very least, it helps us create scenarios, both likely and unlikely, that challenge the conventional wisdom. Which is exactly our mission at EconVue.

I’ve highlighted some of the more non-intuitive analysis of our experts below. Full texts of their forecasts will be available on our website this week, and links will be available in our first newsletter of 2018. We wish you all a Happy & Prosperous 2018!

Collin Canright, Fintech

A major central bank will issue a cryptocurrency. I expect it will be the Bank of England. Brexit is pushing hard on London's position as the world's financial capital, and nothing pushes innovation forward like a crisis.

Identity will become the first “killer app” of blockchain technology. The identity break crisis in the United States will create momentum for individuals to control their identity details.

Pascal Bouvier CFA, venture partner at Santander InnoVentures, sums up 2017 in a single tweet: "With all the craziness we experienced in 2017 (new US administration & its policies, bitcoin chaos, China rising, geopolitical topsy-turvy), the $ is still the most trusted brand in the world. Hard to see that changing in 2018 either." 

The last word goes to Nobel Prize winning economist Milton Friedman as he describes the functions of cryptocurrency in 1999.

Nikolai Tagarov, Global Macro

Russia will continue to flex its military muscle, in the Middle East and elsewhere. Ironically, we will continue to observe the rebuilding of the pre-Communist era Russian Empire, with all the sociological, ideological, political and economic implications that this brings. The question is how long this can be sustained. My answer is: at least through 2018.

EU is likely that given the receding tide of nationalism throughout Europe the UK will reach wide-ranging agreements with the EU which will mean changes in the status quo will not be drastic, while UK will be less constrained by Brussels to act unilaterally to develop stronger ties particularly with China but also with the US.

Middle East Instability focal points in this volatile region will shift from Syria to Lebanon and Saudi Arabia and the prospect of establishing an autonomous Kurdistan province. The military resurgence of Russia, and economic interests of China in the region will act as stabilizing forces which will likely prevent serious conflicts.  

China Many of the difficult reforms that are badly needed were postponed to 2018 due to the 19th CPC Congress. Monetary policy will tighten and companies will need to deleverage. Real estate prices in major cities will stabilize or even decline as mortgage credit will remain tight.  

USA In order to try to get reelected in two years' time, in 2018 Trump will be forced to (appear to) act tougher vis-a-vis China and will pursue economic nationalist policies. On the other hand, the Trump Administration will likely start implementing large manufacturing and infrastructure investment projects with Chinese funding, e.g. via the new CIC-Goldman fund.

Karim Pakravan, Global Finance

The global economy is finishing 2017 on a strong note, firing in a synchronized fashion on all four cylinders (U.S. Eurozone, China and Japan), with some assist from major emerging markets. This momentum is expected to carry into 2018, with global growth estimated at around 3.5% by both the IMF and the Organization for Economic Development and Cooperation (OECD).

The oil market has recently tightened, leading to a sharp price increase. However, rising prices also mean rising U.S production. On balance, this means oil prices in a Goldilocks level of $55-65 per barrel (US WTI) over the next few months.

In the case of the U.S., the economy is approaching full employment, growing at 3.0%-plus (annualized) in the past two quarters. Potential output growth is estimated at 2.5%.Inflation remains underperforming, with PCE Core Inflation at around 1.4%. The economy is well positioned to continue to grow at trend over the next two to three quarters.

However, with the economy close to full employment, the main threat to a continued expansion would be a rebound in inflation, which leading to a sharper tightening of monetary policy by the Fed. The implications of the tax cut, if enacted, are likely to be modest both in the short and longer term. If anything, a tax cut could actually increase inflationary pressures in the short term.

My forecast for the United States for 2018 is as follows:  GDP, 2.5-2.75%; Headline inflation, 1.8-2.0%; unemployment 4% at end-2018; Fed Funds rate, 2.5% at end-2018.The U.S. expansion is now the third longest in the post-War era, and does not show signs of ending soon. Three factors could trigger a recession: surging oil prices, stock market tail risks, and a political shock (domestic or global). My concern would be the second one, although I see it as a low probability event.

Robert Madsen, Geopolitics of Leadership

The global economy ends 2017 and enters 2018 in apparent good health.  The odds are that world GDP growth, measured at market exchange rates, will continue at a year-over-year rate of nearly 3%.  The main economic risks to this scenario—primarily the deflation of asset bubbles in the US or a debt crisis in China’s corporate sector—seem unlikely.  More worrisome are geopolitical trends. 

In recent years many countries have evinced a trend towards greater concentration and personalization of political power.  This does matter because narrower governance structures are less resilient when addressing crises, and personalized regimes are sometimes led by the preferences and characteristics of individual leaders into strategic miscalculation.  The danger is even more acute when strongmen arise simultaneously in different countries.

2018 thus begins at a time when names like Putin, Xi, Kim, and even Erdogan are unusually prominent in the public discourse.  The accretion and personalization of power is especially unsettling in anticipation of elections with potentially global implications in the United States, Russia, Italy and other European countries, and Iraq; for during campaigns governments become more introspective and politicians incline further towards nationalistic sentiment.  The consequent risk of geopolitical disturbances is what should keep people awake at night in the New Year.

Robert Shapiro, US Political Economy

The key challenge and issue for the United States in 2018 is Donald Trump.

The United States is likely to face a unique challenge in 2018: How to manage an international economic or geopolitical crisis in the face of growing doubts about the competence, integrity, wisdom and stability of U.S. leadership.  No one can say if a serious crisis will erupt next year in the Middle East, the Korean peninsula, the Pakistan-India border, or at the heart of the financial systems of Southern Europe or China.  We do know that if the United States and its allies are unable to take unified. Intelligent and decisive action, the economic and political consequences are likely to be dismal and daunting.

Over the past year, such confidence in America’s commitments to its international agreements has been shaken by Mr. Trump’s decisions to withdraw the United States from the Paris climate accord, end U.S. participation in any type of Trans-Pacific Partnership, and consider withdrawing from NAFTA.

International confidence in the integrity and competence of the U.S. Government has been shaken by large-scale resignations from the U.S. Foreign Service and Mr. Trump’s failure, after nearly one year in office, to even nominate anyone to more than 50 percent of the most senior positions at the Departments of State, Treasury, Justice and Energy, and about one-third of the most senior positions at the Departments of Defense and Homeland Security.

As 2017 comes to an end, the economic and geopolitical costs of this well-based lack of international and domestic confidence in Mr. Trump’s leadership seem both genuinely serious and, alas, ultimately unavoidable.

Marsha Vande Berg, Investor Perspective

We conclude 2017, clinging tightly to a still uncertain confidence that job expansion and strong consumer spending can somehow continue, that advancing gains in the capital markets will persist and the promise of global growth engines in China and India, the world’s two most populous countries, is realistic. Growth projections are now pushing north of three percent – and yet there is an uneasy undertow to such an outlook for investors. 
Investors understand that what goes up may come down, and that markets thrive on perceptions, sometimes accurate and sometimes not so accurate. It’s especially problematic when there is a growing disconnect between the success of the markets and the politics of the country being managed by a leadership that eschews governing.  As the Trump administration attempts to fundamentally rewire both the domestic political and regulatory discourse as well as America’s role in the Northern Hemisphere and internationally, confidence in the markets and the economy is sure to be tested.

Whether it’s about trade, deregulation or staffing the offices of government to get the work of government underway, there is the threat that the depth of the disconnect we sense between the economy and politics in the United States is grist for policy error and wider geopolitical risk.

A fractured US/Mexico relationship and a less than favorable trade agreement for any and all of the three countries in NAFTA would portend major changes for manufacturing and businesses that are dependent on global supply chains as well as for the consumers who have benefitted.

Michael Lewis, US Economic Data

2017 will close with +2¾% real GDP growth
Core Inflation just below the +2% target (both for 17Q4)
Jobless rate just over 4% & equities Up +20% (S&P 500)
The Stage Is Set for Another Solid Performance in 2018:
Real GDP likely to grow +2.7%, best calendar year since 2014, aided by tax stimulus and improving growth abroad
Core Inflation should trend up, breaching Fed’s +2% target by summer and ending 2018 Near +2¼%
Equities likely to enjoy another good (but single-digit) year; 10-Year Yield Should Rise to 3% by the End of 2018
At minimum, Powell-led FOMC should keep ‘dot plot’ pledge for three +25BP rate hikes next year (four quite possible)

Lyric Hughes Hale,The Longer View

China plans to limit urban development and decrease energy utilization. Effects: massive.
Imposition of property taxes in China for the first time will be initially disruptive and will stem the tide of investor-led residential property investment due to carrying costs for holding real property.  However, unlike the US, taxes will be collected and dispersed by the central government rather than local jurisdictions, limiting its economic effectiveness.
Technological advances will continue to outrun and flatten the Phillips curve.
Japan’s laudable corporate governance reforms will eventually be overshadowed by its demographic decline.
Africa is the continent with the most favorable demographic future. 60% of the world’s population under the age of 25 resides in Africa. Nigeria will replace the US as the third most populous nation by 2050.

Iran’s current political unrest looks more like civil protest than a revolution.  But should a peaceful Iran on-stream into the world economy, the effects could be transformational.
Energy usage by blockchain and cryptocurrencies will for now at least, cancel out gains by renewables.  For the foreseeable future, we will be living in the age of carbon fuel.
Cryptocurrencies are moving from Silicon Valley to futures exchanges in Chicago and asset managers on Wall Street. In 2018, they will develop into a new asset class. Since most of the current owners are Japanese and Korean households, geopolitical conflict with North Korea could affect crypto significantly.
Autonomous electric vehicles will not be deployed to retail consumers in 2018.  But by 2028, they will be ubiquitous.

As always, we must make the disclaimer that our views are expressed in order to challenge our readers and conventional thinking, and are not intended as investment advice.