The superheroes and villains of the economy in 2017

The superheroes and villains of the economy in 2017
PHOTO: The Straits Times

This year, the economy may look like it has something in common with your favourite Marvel characters.

Look around the negotiating table for the G20, the United Nations General Assembly, the Eurogroup, or any other global forum, and you will see there are superheroes and villains going through the motions.

They all want to use their superpowers at the same time and without much coordination or thought. As a result, the consequences could be huge.

This year, sidekicks will attempt to gravitate around superheroes, flexing their muscles and vivifying the masses. Villains will be looking for mistakes and causing mischief.

Here is our primer on Captain America, the European Spider-Man, the Chinese Iron Man and the Fantastic Four of the emerging world.

US CAPTAIN AMERICA: FLEXING FISCAL MUSCLES, PICKING TRADE BATTLES

Our baseline scenario for the US (65 per cent likelihood) foresees a partial implementation of the electoral policy pledges made by President Donald Trump, including the launch of a fiscal stimulus package for 2017.

The subsequent reflation will cause the Federal Reserve to tighten monetary policy at a faster pace over the next three years.

But not all sectors will be winners.

Electronics and textiles could be more impacted by the negative spillovers of the Trump administration's trade policy than by the positive externalities of the fiscal boost.

EUROPEAN SPIDER-MAN: AGILE POLICY MIX TO PROTECT GROWTH

Europe faces three challenges.

First, Brexit continues to weigh on confidence in the UK; second, the Italian banking situation; and third, a tricky electoral calendar.

Yet, the regime switch in multilateralism could also mean that Europe flexes its policy muscles on industrial, innovation and trade policies to dodge the balls coming from the US and China.

THE CHINESE IRON MAN IS FINE-TUNING ITS POLICY BATTLE SUIT

The Chinese government's ability to support growth through credit has deteriorated.

For each 1 billion yuan (S$205 million) of additional growth, there was 1.8 billion yuan of additional domestic credit in 2011.

This figure now stands at 3.6 billion yuan.

As a consequence, the authorities are creating their own league to promote and finance growth rebalancing. China is accelerating its agenda of outside influence in these ways:

- The One Belt, One Road initiative has kicked off with projects in Pakistan and East Africa. Infrastructure financing (Asian Infrastructure Investment Bank and Silk Road Fund) has been pivotal.

- An agreement could be reached on the Regional Comprehensive Economic Partnership (or RCEP), a free trade agreement between ASEAN members, Australia, New Zealand, India, Japan, South Korea and China.

- On the currency front, the yuan internationalisation as a means of payment and as a reserve currency should gather steam this year.

EMERGING FANTASTIC FOUR WILL NEED SUPERPOWERS TO ATTRACT INVESTORS

Using inflation and current account dynamics, we created a typology of markets outside the G3 to understand investors' selectivity going forward.

- Countries with low inflation and a current account surplus, like South Korea, are our Mr Fantastic: They have ample buffers and will show higher growth this year.

- Countries with vibrant growth prospects as rebalancing progresses both internally and externally are the Human Torch, for example, India, Russia, and Poland.

- A third group consists of countries with stagflation and important current account deficits, which are trying to reduce their imbalances, for example Brazil and South Africa. They are our Invisible Woman since no growth is in sight this year.

- Lastly, the economies and policies that are heading in the wrong direction - like Turkey and Mexico - leading to a backlash down the road are the Thing.

GUARDIANS OF THE ECONOMY

After years of mutant economics, global growth will face three of the most powerful X-Men:

- The price Wolverine. Several forces now favour a price recovery. Euler Hermes forecasts the yearly average Brent oil price to rise this year. Supportive policies are finally working, and this is particularly the case for China from Q2 to date.

- The trade and finance (de) Magneto. Protectionism, whether it is new restrictions or indirect measures (public procurement, subsidies, compensation), has been on the rise. Financial flows within and between countries continue to disappoint. Capital is not going into the real economy.

- Even more policy Storm(s). This will be another year of heavy politics weighing on the economic performance. Contagion risks from the US are particularly high as it is the largest economy, the most interdependent (largest current account deficit, the hegemony of the dollar), and the marketplace for many global goods and services. Business interests will inevitably be elbowed here and there.

The writer is Head of Asia Pacific Region at Euler Hermes, the global leader in trade credit insurance.


This article was first published on Feb 6, 2017.
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