The major economic worries that have defined the start of 2018 are not much different from those that many observers had a year ago: 1. Will president Trump trigger a trade war? 2. Will there be a hard Brexit? 3. Will the Chinese economy crash? And finally, 4. will the global economic cycle come to an end?
Looking ahead to 2018, let’s see if these risks are likely to be worse, about the same or less pronounced than in 2017…
US president Trump has not yet started a trade war with either China or Mexico despite the heavy rhetoric in this direction during his campaign. Why could this be?
Firstly, politicians tend to shift a bit to the centre after election. Trump seems to be no exception.
Secondly, Trump sees his political interests better served by pointing up the rallying stock market and booming US economy – which are partly down to the mostly sensible, ongoing fiscal and regulatory reform.
If the US economy suddenly nosedives and Trump needs someone to blame, the risk of trade wars could rise. But since the US economic outlook is promising, this risk is probably unchanged versus last year.
The UK government’s initial illusions about Brexit and what can be achieved in the negotiations with the EU gradually faded over the course of 2017.
In late December, some nine months after the UK started Brexit proceedings, the terms of divorce were broadly settled. This has lowered the risk of hard Brexit compared to last year. Brexit negotiations in 2018 can now focus on future UK-EU trade.
Still, with so many interests – and political careers – at stake, the risk that talks could fall through at any point remains serious.
The challenges facing China’s economy are well known: high debt and government efforts to constrain leverage; unfavourable long-run demographics; and a command-and-control government that misallocates economic and financial resources.
Will these problems come to a head in 2018?
Probably not: China has ample policy tools to delay the potential pain. It will use them if need be. However, each year that China continues down an unsustainable path pushes up the chance of a correction. This risk is therefore a bit higher than a year ago.
However, China has not yet managed to defuse its debt problems. The Chinese risk remains almost as serious as it was a year ago.
Will the upswing end this year? That still seems as unlikely as a year ago.
Remember, economic upswings do not die of old age. So far, there are no major signs of excesses in major parts of the world that could require a cleansing recession any time soon.
Wage and price gains remain subdued, firms are not overproducing or investing too much relative to demand, and credit growth remains modest relative to historical averages. If things carry on like this, this expansion has legs.
Economic risks come and go. Some are temporary, others are lasting. Call it dumb luck, but most risks do not materialise.
Recessions and major crises are rare events. Even many bubbles do not pop catastrophically.
Apart from the occasional bump in the road, economic conditions tend to get better each year. Chances are that this year will be another good one.
Kallum Pickering is senior UK economist at Berenberg Bank