The year 2017 is drawing to a close and we are embracing the year 2018 in less than 1 week. Looking back at this year, we have quite a bumper year despite the pressures of Brexit, US withdrawal of the TPP free trade agreement, hurricanes, nuclear rocket diplomacy and the early controversies of the Trump Presidency. All these were worrying stories in their own right but a sideshow on hindsight.
We are moving into the 10th conservative year of the global recovery since the 2008 Global Financial Crisis, and the S&P 500 had risen from the low of 683 in March 2009 to 2680 today in December 2017. US GDP grew by 3.3% in Q3/2017 and it is the fastest growth in 3 years on the back of higher investment and business spending.
The bullish outlook for the coming year can be summarized by Goldman Sachs’ title of ‘As Good As It Gets’ where they predicted a bullish 4% growth for the global economy. In their outlook, we should see more inflation as the employment market improves and supply is constrained. President Trump’s major legislation victory came in the form of tax reform which cut the top corporate tax rate from 35% to 21% and included sweeteners for individual tax.
The new year will bring new challenges and uncertainties and here are two to look out for:
- Brand New Federal Reserve For 2018
The new year brings a new chief to the Federal Reserve and the possibility of a radically different Federal Open Market Committee (FOMC). The current Fed Chief Janet Yellen is set to leave office in February 2018 and set to be replaced by Jerome Powell.
President Trump broke with the tradition of nominating highly regarded economists as the Chairman of the Federal Reserve and nominated Powell who was a former investment banker and lawyer. He is seen as likely to continue on the Fed’s current path of slowing raising interest rates and reducing the balance sheet.
In other words, interest rates will raise but the question is how fast will they raise in the coming year? The interest rate is ultimately decided by the FOMC, which comprise of the Board and rotating members of the regional Fed. Interestingly, 3 out of the 7 Board members are vacant and 1 will leave in the middle of next year.
The market expectation is that of status quo but the same can be said of the UK referendum on whether to stay in Europe. It was supposed to be one sided on stay side until the results came out. For the economy, the upset would be if the Powell Fed turns out to be more hawkish than expected.
On a side note, the fact that Powell thinks that current regulations are ‘tough enough’ should bring smiles to the face of embattled bankers who suffered fines and lending constraints for the past 9 years.
- Chinese Debt Situation
Bloomberg noted that China is already the world’s largest trading nation and by 2027, China is take over the United States as the largest economy in the world in nominal terms assuming 2% growth for the US and 6.5% growth for China. Today, China is already the second largest economy in the world and there are worries of a Lehman Brother style collapse given their high level of indebtedness.
Source: Business Insider
The Chinese banking system is one of the largest in the world. Total Chinese debt stands at 300% of its GDP while its corporate debt stands at 170% ($18 Trillion) of GDP. Various parties such as the IMF and rating agencies had raised alarms over China’s debt situation.
The IMF warned that debt risk had moved to other ‘unsupervised’ areas of the economy. One such area is the rise of online lenders which was published by the New York Times this Christmas. Online lenders are prevalent in China where they deploy questionable credit assessment and sticker advertising to reach desperate borrowers. Some are ambitious young man who wants to start their own business to improve their fate but lack the proper loan financing guidance.
Official central bank estimate of such bad debt stands at $145 billion but the estimate by Boston Consulting Group stands at $392 billion. If China were to have a Lehman style crisis next year, then all bets are off the table. Of course, there were some people who defend China saying that it is an emerging economy whose debt problem is a recent 5 years problem compared to the 50 year problem for advanced economy and it will outgrow its problem.
Keep A Lookout but Don’t Be Overly Worried
These are the two main macroeconomic trends to keep a lookout for in the following year. Most worries don’t come to fruition as regulators and policy makers are not asleep most of the time. After the GFC, there are worries that the European Union might disintegrate over the Greek loan crisis, but they are still standing today.
Technology is the other trend which enhances the productivity of companies. For instance, 3E Accounting uses robotics to allow staff to have face to face meetings even when they have to be at home. Between the productivity enhancing technology and the growth momentum, it is likely that 2018 will be a good year. (Hopefully).
