The best hope for the global economy in 2017 also happens to be its biggest threat: Donald Trump. This apparent contradiction is reflected in the disparate reactions to the celebrity real-estate investor’s election victory.
The financial markets love Mr. Trump. Since he became the U.S. president-elect in November, the Dow Jones stock index has risen by 9 percent, creating $260 billion (€245.6 billion) in wealth on the stock exchange.
“If Trump follows through on his promises for massive tax cuts and infrastructure investment, it would provide a large, temporary boost for the U.S. economy,” said Clemens Fuest, head of the German economic research institute Ifo.
This kind of stimulation, so the optimistic theory goes, could have a positive effect on Europe and the rest of the global economy. After all, the United States is still the planet’s biggest economic powerhouse, and both Europe’s and China’s most important export market.
But at the same time, leading economists around the world are warning against the enormous risks a Trump presidency could pose for the global economy.
In academic circles, Mr. Trump is derided. In trade circles, he's praised.
Dennis Snower, the president of the Kiel Institute for the World Economy, said he expected Mr. Trump to pursue economic policies strongly driven by protectionism.
As if to confirm this, Mr. Trump began the new year by using Twitter to take aim at the General Motors, threatening to slap import duties on any vehicles they made in Mexico.
“General Motors is sending Mexican made model of Chevy Cruze to U.S. car dealers-tax free across border. Make in U.S.A. or pay big border tax!” the president-elect tweeted on January 3.
In an apparent reaction, General Motors’ competitor Ford announced that it had scrapped plans to build an assembly plant in Mexico, in an act of anticipatory obedience. Instead, Ford said it would invest the money in its home state Michigan.
Mr. Snower has no illusions about the potential impact of such protectionist measures. Less foreign trade will have “a tangible negative effect on productivity and consumption in the US and around the world,” he said.
In academic circles, Mr. Trump is derided but praised in trade circles. He is the embodiment of the two major contradictions casting a shadow over the global economy at the start of the new year.
On the one hand, there is the gap between debt-driven growth and the search for a new and sustainable model for economic expansion in industrialized countries.
And then there is the problem of globalization generating massive wealth, yet being unable to distribute that wealth fairly. This has led to protest movements that threaten globalization.
The financial markets don’t care that much about this. Traders think in the short term, seeing only the economic boom that Mr. Trump’s promises of tax cuts and increased government spending on infrastructure could produce. Hence the rise in stock market wealth.
The fact that building more highways and bridges is about as questionable as building a wall between the United States and Mexico, or the fact that Mr. Trump’s plans would only send the U.S. further into debt, has not had a sobering effect on Wall Street.
And why should it? Someone has to come up with a new, innovative way to create, buy and sell all that debt. That’s where Wall Street shines. And Mr. Trump has already assured everyone he intends to let bankers off the short regulatory leash they have been on recently.
In fact, the last thing the U.S. economy needs is more stimuli. The International Monetary Fund estimates that in 2017, the U.S. economy will grow by 2.2 percent – without any help from the incoming Trump administration. The jobless rate is at 4.6 percent, which is considered close enough to full employment.
The head of the U.S. Federal Reserve, Janet Yellen, has been uncharacteristically blunt in her assessment that Mr. Trump’s promised economic policies could cause the U.S. economy to overheat. The economy, she said, could regress into “debt-financed growth”. The U.S.’s debt-to-GDP ratio is already at 107 percent. Any higher and Ms. Yellen could find herself in a power struggle with the new president in which she would be forced to raise interest rates to counter rapidly rising inflation.
Of course, Mr. Trump’s drive for more growth could be stopped – but that, too, would have significant consequences for the rest of the world.
Outside of the U.S., all the world’s large economic blocs are already having to artificially animate growth, either through rising debts or with an expansive monetary policy, a trick more commonly known as “printing money.”
The country furthest along is Japan but China is also succumbing to the temptation of essentially buying growth. “China has succeeded in revitalizing its economy through expansive monetary and fiscal policy in 2016,” said Kiel Institute’s Mr. Snower.
The leadership in Beijing should know though that “this kind of policy is contrary to the goal of steering the Chinese economy toward economically and ecologically sustainable growth,” he added.
The Kiel Institute estimates the Chinese economy will expand by 6.5 percent in 2017. In 2018, it could be less than 6 percent. If the country’s leadership continues to try and artificially counteract this downturn, “the volume of credit would rise considerably and the risk of an economic collapse would emerge,” Mr. Snower said.
And he isn’t the only one who is warning of a crash in China. “A crash caused by debt and massively poor investments can’t be ruled out,” said Ifo’s Mr. Fuest.
In the euro zone, the European Central Bank has taken it upon itself to kick start growth with negative interest rates and an enthusiastic bond buy-up. With so many European economies still struggling, it’s going to be a while before the ECB lets those stimulus measures subside. The issue is that while “printing money” may buy time to implement reforms that could spark growth through innovation and rising productivity, cheap money also tends to have a dis-incentivizing effect.
“The extension of the ECB’s quantitative easing program will keep interest rates in the euro area low and continue to hamper necessary structural change in southern European countries,” Mr. Snower warned. If reforms fail to materialize, economies in Europe will only become more vulnerable to a crash.
Globalization is its own worst enemy. Economists were unanimous in their prognosis that protectionism will be the biggest threat to the global economy in 2017.
Growth that is only created by printing money almost always leads to speculative bubbles. When the bubble pops, as it did during the dotcom bust in 2001 and the financial crisis in 2009, chaos ensues. Unfortunately, neither of these crises convinced policymakers that growth is not something that should be purchased by printing money.
But there are other opinions. Marcel Fratzscher, head of the German Institute for Economic Research in Berlin, is more optimistic.
“Critics in Germany view the reforms of our European neighbors too cynically and negatively,” he said. “The full effect of those reforms remains to be seen. Spain and Ireland are in very good shape. Others will follow.”
Mr. Fratzscher, however, does view Italy skeptically. The country “has brought about important reforms, but its banks could derail the entire economy if politicians fail to act,” he said.
Even if Europe’s laggards manage to get their act together, there’s still that second major problem looming over the global economy: Globalization is proving to be its own worst enemy. All of the economists interviewed for this article were unanimous in their prognosis that protectionism will be the biggest threat to the global economy in 2017.
It won’t take long for the world to start working against globalization; it will begin this year. According to the Cologne Institute for Economic Research, the global economy is expected to grow by 3.25 percent in 2017. However trade is only expected to increase by 1.75 percent.
A rising share of economic output will take place inside national borders. Protectionism and nationalism are not only becoming popular in countries that were once fervent proponents of open markets, such as the United States. Many eastern European countries, Turkey, Russia and China are also experiencing this. The Netherlands and France also have upcoming elections in which opponents of globalization could emerge victorious. Italy might also put a euroskeptic party into power if the Five Star Movement wins in new elections.
Most of the time, protests against globalization are embodied by voters in the polling booth.
This happens even though there’s no scientific proof that globalization is a direct cause of anything but prosperity around the world. The problem is that this prosperity is not felt by everyone in equal measures.
The winners of globalization are people who invest capital around the world or whose qualifications allow them to get a job wherever they like. On the other end of the spectrum are the individuals with no capital to invest, who have found themselves competing with low-cost laborers in some far-away place.
That in itself is not a good enough argument against globalization, especially if countries manage to distribute the gains from free trade more fairly among their populations. Unfortunately, that’s usually not the case.
Mr. Trump’s victory was handed to him by a disenfranchised middle class that felt threatened by what it perceived as its looming demise. Brexit, too, was the manifestation of anxiety over having to compete with immigrants for jobs, housing and social services. The fact that both of these groups’ perceptions do not reflect reality did not ultimately matter.
Most nationalist, protectionist movements are fueled by fear. It doesn’t matter whether people’s real incomes are rising or falling. In the end, what matters is what people believe is happening. Perceived social standing has a greater value, one that cannot be measured in dollars or euros. The social cost of open borders is impacting the economy too: Nearly every election is an event to be feared by private investors.
This insecurity is “poison to the economy and above all, for private investors,” Mr. Fratzscher said.
And this is where the circle closes. Without private investment encouraging innovation and better productivity, there can be no sustainable economic growth. Europe is buying its way out of meagre GDP growth by going into debt and printing money. This will create speculative bubbles, ones that could burst at any time should the public’s frustration with globalization spill over into more extreme election outcomes. And again this kind of insecurity will discourage investment, and therefore also sustainable economic growth.
Smart economic policies could lift the world economy out of this vicious circle, without a crash. That means real reforms need to be enacted, using the windows of opportunity central banks are currently providing, with priority given to private investors and no reduction in free trade. At the same time, those who have lost because of globalization must be compensated with something more: better education opportunities, exempting low-income earners from certain taxes, more social security if necessary.
However, there is still one major problem: None of these ideas are on the political agenda of the incoming U.S. president, Mr. Trump.
Jens Münchrath is based in Düsseldorf and heads Handelsblatt’s coverage of economics and monetary policy. Christian Rickens covers business and economics and has published several books. To contact the authors: firstname.lastname@example.org, email@example.com