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Societal, Climate Issues Noted as Key Global Risk Factors

Rising income inequality and societal polarization triggered political change in 2016 and could exacerbate global risks in 2017, according to a new World Economic Forum report.

“Climate change ranks alongside income inequality and societal polarization as a top trend for 2017, with all five environmental risks featuring for the first time among the most likely and most impactful risks before the world,” the Global Risks Report 2017 states.

This year’s annual survey includes 750 experts who assessed 30 global risks, as well as 13 underlying trends that could amplify the risks or alter the interconnections between them, the report says. The following three key findings emerged from the survey:

  • Patterns persist. Rising income and wealth disparity and increasing polarization of societies were ranked first and third, respectively, among the underlying trends that will determine global developments in the next 10 years. Similarly, the most interconnected pairing of risks in this year’s survey is between high structural unemployment or underemployment and profound social instability.
  • The environment dominates the global risks landscape. Climate change was the No. 2 underlying trend this year. And for the first time, all five environmental risks in the survey were ranked both high-risk and high-likelihood, with extreme weather events emerging as the single most prominent global risk.
  • Society is not keeping pace with technological change. Of the 12 emerging technologies examined in the report, experts found artificial intelligence and robotics to have the greatest potential benefits, but also the greatest potential negative effects and the greatest need for better governance.

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German Economy Grows

Chris Kuehl, Ph.D.

News for Chancellor Angela Merkel was not very positive for most of last year. There was one political issue after another. This has caused some people to question whether she will be able to win another term as leader of Germany. The best news for her has been the weakness of her opponents as opposed to anything else that would give her an edge. The refugee issue blew up in her face and prompted some draconian responses. The terror attacks only intensified angst in the overall population. In the midst of this political gloom, however, comes the news that Germany’s economy is doing better than it has in years. This is also something that Merkel will be able to point to.

The success of the economy has come despite a series of headwinds, which threatened to derail the whole process. There was Brexit, the more-than-expected slowdown in China, the crisis that dumped Matteo Renzi from power in Italy, the unexpected rise of Donald Trump and the ongoing crisis in Turkey. Any of these events should have been enough to derail growth in Germany, but that has not been the case thus far.

What happens in Germany matters immensely to the whole of Europe because it accounts for more than a third of all of the EU’s output. Consumers in Germany have come out of their funk and made this last holiday period one of the best in years. Right now, the German labor market is as good as it has been since 1991. This is the best jobs data since the two Germanys reunified. That means growth in the former East Germany has been especially robust. The expectation is that these numbers will improve even more this year due to the lowered value of the euro.

Germany is among the most export-dependent countries in the world. Exports account for almost 54% of the national GDP. This is the chief concern going forward because Germans are well aware that other members of the EU do not share their success. Although German output is completely global, the bulk of export activity occurs within the EU. The most important markets outside the EU are in the U.S. and China. These two seem to be going in opposite directions of late. Germans are encouraged by growth projections in the U.S. and a little discouraged by slowing Chinese demand for their industrial goods.

From a political point of view, the Merkel administration has been heartened by this news given that Merkel faces elections toward the end of this year. The public is still not happy with the refugee situation, but all will be forgiven if the economy is surging at the end of the year. Right now that seems a likely bet.

The World in 2017, As I See It

Dr. Hans Belcsák

It is, no doubt, a folly for me to attempt a slew of political and economic forecasts for the coming year. Even under the best conditions, the unfathomable variables on a global and national scale are so plentiful, so fleeting and so easily misleading that the odds weigh heavily against anyone trying to play the oracle. The chances of being proven wrong are so much greater than those of being right on all issues. Yet, no business can function without its stewards taking a view of what, at least on current indications, they believe the future may hold. So I have resolved to throw caution to the wind and take a stab at what I think the coming year will bring. Here goes.

Global Trends
Repatriated company earnings, the unwinding of carry trades, a more general reflow of funds out of emerging markets and psychological factors will keep the U.S. dollar remarkably strong in 2017, intermittent (brief) dips notwithstanding. On the whole, this tends to be a positive for the U.S., but keep in mind that it makes dollar debt more expensive to repay for many emerging markets and reduces the foreign-currency earnings of U.S.-based multinationals as they are restated in dollars.

The world economy should grow between 3% and 4% in purchasing-power-parity terms, despite the many political uncertainties and risks bedeviling it. But the march toward ever-increased globalization that has been the hallmark of years past will come to an at-least-temporary standstill.

The political trend toward nationalist, populist and frequently authoritarian regimes will persist in many lands, including China, Turkey, Russia, Hungary and Poland. This will keep the international political atmosphere more highly charged than what we have become accustomed to.

While loosened regulations will allow the U.S. to make some noticeable progress toward incoming-President Donald Trump’s goal of energy self-sufficiency, this will initially not be enough to counteract efforts by OPEC and other traditional producers to shore up world market prices for oil.

Russia under President Vladimir Putin must be expected to persist in its efforts to destabilize Ukraine, undermine European unity, weaken NATO and firm up its new footholds in the Middle East, but it will meet with a growing push-back from the United States.

United States
There is a notion going around that Donald Trump and the business leaders he has chosen for his cabinet are not qualified to manage a political system such as that of the United States because they are used to making decisions and giving orders that they expect to be obeyed, which is rather different from having to shepherd policies through all sorts of political obstacles. This view totally ignores, however, that those at the helm of big business have to engage and satisfy a host of constituents, from shareholders, board members, legal authorities and the media to employees, suppliers, customers, lenders and many levels of government. They are used to forging compromises. Also forgotten seems to be that failures in business tend to end careers unlike in government where mistakes rarely have personal consequences. For CEOs, accountability is a reality, not just a talking point.

Notwithstanding vows by Democrats that they will hold up, if possible for months, the confirmation of at least eight of President-elect Donald Trump’s cabinet nominees, the first 100 days of the new administration will see quick and aggressive moves by the White House and the Republican-controlled Congress to go ahead with its agenda of tax cuts, deregulation and course changes regarding health care and immigration.

Trumponomics will give business activity a potent boost. So will a burst of outlays (government and private) on infrastructure. The Federal Reserve will continue to nudge interest rates higher, but cautiously and with a watchful eye peeled on the response of the financial markets and on business conditions as a whole. Despite the uncertainties confronting it at present, the economy will have a good year. There is a strong chance that it will be able to register real GDP growth of 4% this year–perhaps more.

As for President Trump himself, he will continue to use Twitter as his way of getting around a still badly biased press and television community and of delivering his messages directly to the people. This could lead to misunderstandings because discussing policy in 140 characters or less is not easy. So, in trying to gauge Mr. Trump’s drift, those taking him seriously, but not literally, will continue to do far better than those taking him literally, but not seriously.

Britain will trigger Article 50, which sets the United Kingdom’s departure from the European Union in motion. (Prime Minister Theresa May’s self-declared deadline is the end of March.)

In the French elections, the decisive presidential runoff will include National Front leader Marine Le Pen, but she will not win. While many of her nationalist and anti-immigration policy proposals resonate with the people, especially with a disenchanted working class and the unemployed, there is no majority for her plan to take France out of the eurozone.

In Holland, the populist nationalist Party of Freedom may come in first, but it will not be able to form a governing coalition.

In Germany, Chancellor Angela Merkel still has a chance to win the fall elections, provided there is no further, large-scale terrorist attack. But her Christian Democratic Union and Christian Social Union bloc will suffer setbacks, and the hard-right Alternative Fuer Deutschland will gain entry into the Bundestag.

With anti-euro parties likely to score substantial gains in French, Dutch and German elections, the risks to the common currency will not go away; and in the FX markets, the euro will remain vulnerable on the downside. But this will help eurozone economic growth, which should come to about 1.5% in 2017.

While the state will bail out Italy’s Banca Monte dei Paschi di Siena, other troubled European banks will make news, including Spain’s Banco Popular and Portugal’s Novo Banco.

Latin America
President Trump will lose no time building the southern border “wall” against the influx of illegal immigrants from Mexico, but the term wall need not be taken literally. In part, this will be a fence; in part, an electronic barrier. The main point is that border controls will be sharply increased, and the merry-go-round allowing deported criminals to come back time and again will stop.

Overall, Mexico’s relations with the United States, both economic and political, will become markedly more complicated than they have been, and the exchange market performance of the peso will reflect this. There will be no trade war, however, and newly appointed Mexican Foreign Minister Luis Videgaray, who has a doctorate in economics from MIT, is a man whom Mr. Trump trusts.

While there is much concern about the fact that Mr. Trump has vowed to renegotiate or cancel NAFTA, both Canada and Mexico have said they are willing to discuss updating the accord.

Mid-term elections in Argentina will show how little public support there is for the austerity measures under President Mauricio Macri.

In Chile, the governing Leftist coalition of outgoing President Michelle Bachelet will have a tough time in the presidential elections.

Venezuela will not default on its debt, simply because the regime is too worried about the consequences, including the risk that creditors would seize the country’s oil export cargos and thus turn off all hard-currency earnings. Without this income, the government would not have the wherewithal to support the patronage and buy the military support that allows it to keep a lid on the smoldering cauldron of popular discontent.

The Colombian government’s peace accord with the Marxist insurgents will keep running into criticism in the country as well as abroad for its perceived lack of adequate punishment for the guerrillas, but it has survived (with amendments) even after the voters rejected it and will go into the history books as last year’s most significant political accomplishment.

China’s President Xi Jinping will make it clear at the once-every-five-year Communist Party Congress that he is intent on further cementing his power. Having sequestered much of the South China Sea as “Chinese territory,” the People’s Republic of China will launch a charm offensive in the region with a summit on its infrastructure program for it.

For President Trump, China will be the main target of his “America first” trade policy, and his administration will adopt a significantly more aggressive approach than followed to date; but China needs the U.S. market, and an all-out trade war remains unlikely. The government in Beijing will struggle to put a floor under the sinking yuan, but it will ultimately succeed and put the exchange rate on a rising trend.

Middle East
A joint offensive involving the U.S., Russia and perhaps several other countries will deal ISIS a devastating blow, striking at its heart in Raqqa and depriving it of both the territory and the oil income allowing it to claim to have established a new caliphate. But this will not be the end of it. The group has metastasized to the point where it will be a worldwide problem for a long time to come.

The Trump administration is not likely to succeed in getting the infamous nuclear accord with Iran canceled, not over the resistance of the other signatories (Russia, China, France, the U.K. and Germany), but it will argue that the pact is no longer valid since Tehran has already violated it in several respects. One way or the other, the “deal” will unravel as the year progresses.

The Trump administration is likely to increase aid for Jordan, support Egypt’s President Abdel Fattah Al Sisi and seek to mitigate the fallout from the recent anti-Israel resolution at the UN Security Council by backing the Jewish state strongly and vociferously against Hamas and Hezbollah and by moving the US Embassy to Jerusalem.

Iran and Syria, meanwhile, will strive to consolidate the “Shia Crescent” promising them dominance over the Sunni Kingdoms and Sheikhdoms along the Gulf, and this, along with lingering distrust in U.S. willingness to provide protection and unapologetic guidance, will trigger an open arms race.

Global Roundup

The crisis in Seoul and risks to the region. South Korea is engulfed in a month-long national crisis that has brought politics to a standstill, and the timing could not be worse for the Korean Peninsula and the region. (The Interpreter)

Trump adviser: TPP 'dead,' will move quickly on bilateral trade deals. President-elect Donald Trump will not revive his predecessor's stalled Trans-Pacific Partnership (TPP) trade deal in any form, but will quickly pursue bilateral trade agreements, a Trump transition policy adviser said. "TPP is dead. I cannot stress that more strongly," said the adviser, who requested anonymity because he was not authorized to speak publicly for the administration that takes office on Jan. 20. (Reuters)

Outgoing USTR warns against TPP withdrawal. Departing U.S. trade representative (USTR) Michael Froman has admitted to supporting President-elect Donald Trump’s plan to combat Chinese influence in trade, but warned that exiting the Trans-Pacific Partnership would have the exact opposite effect. (Global Trade Review)

World Bank downgrades India's growth forecast after demonetization. The World Bank has downgraded the Indian economy’s growth forecast as sharp falls in the country’s automobile and real estate sales flagged the short-term impact of recalling India’s two most-used bank notes. The Washington-based financial institution predicted India’s economy would grow by a “still robust” 7% in the fiscal year to March 2017—a 0.6% drop from its earlier forecast but still the fastest rate of any major economy in the world. (The Guardian)

Preparing for Brexit just got harder. On Jan. 4, British Prime Minister Theresa May named career diplomat Tim Barrow as the U.K.’s permanent representative to the European Union. It will be Barrow who must talk in Brussels with diplomats from the EU’s 27 other member countries, building bridges with people who still feel bruised and angry at U.K. voters for supporting a referendum in June to quit the union. When his invisible work is done, politicians will step in, and formal negotiations will begin by the end of March. Barrow has just 11 weeks to prepare. (Bloomberg)

China and Russia: Protectionism subverting innovation. As the new U.S. administration prepares to get tough on trade scofflaws, a new report from the Information Technology and Innovation Foundation shines a light on a number of countries—notably China and Russia—that have been seeking unfair advantage in high-wage, innovation-intensive industries by implementing protectionist and discriminatory policies. (Global Trade Magazine)

The most promising markets of 2017. Higher yields, less concern surrounding a hard landing of China’s GDP growth and stabilization of commodity prices have contributed to a more robust outlook for emerging market economies in 2017. But uncertainty has increased, with challenges stemming from the strong U.S. dollar and prospects for higher interest rates in advanced markets. That said, some markets are enjoying robust, domestically driven growth in 2017 and are less vulnerable to external volatility, providing potential opportunities for business. (Atradius)

SWIFT enters the blockchain arena. SWIFT is exploring whether blockchain technology can improve global banks’ reconciliation processes. The proof of concept is part of its global payments innovation initiative, which aims to streamline cross-border payments. SWIFT is testing whether distributed ledger technology could help banks reconcile “nostro” accounts in real-time, and at a lower cost and risk. (AFP)


Week in Review Editorial Team:
Diana Mota, Associate Editor and David Anderson, Member Relations