Today, we present a guest post written by Jeffrey Frankel, Harpel Professor at Harvard’s Kennedy School of Government, and formerly a member of the White House Council of Economic Advisers.
The year-end summing-up is harder than usual this year! Here are my five key factors for 2017.
- Continued uncertainty over what US policies will come out of the new Trump Administration.
Reason: we don’t know what he will propose, because he has said so many contradictory things, and we don’t know how much resistance he will face in the Congress.
- Strong dollar and widening US trade deficits
Reason: Rising US interest rates will continue to make dollar assets more attractive to global investors than other countries’ assets. A new monetary-fiscal policy mix, reminiscent of the early 1980s, underlies these trends.
- Difficulties in some Emerging Market countries, especially those dependent on commodity exports and/or with debts denominated in dollars.
Reason: their debt service ratios will worsen, because their debt service obligations are going up while their dollar export receipts are going down.
- China forced to choose between halting the depreciation of the RMB, on the one hand, versus further internationalization of the currency on the other hand.
Reason: Controls on capital outflows could be used to slow down the fundamentals-driven depreciation, but imply suspending the RMB internationalization project for the time being.
- The possible end of a 70-year period of US-led global progress toward a liberal international order.
Reasons: Global trade has stopped rising as a share of global GDP since 2008. One factor is that we have had no important successful new trade deals. Now the incoming US President appears explicitly to reject the very ideas of globalization, liberal values, and US leadership. Analogous nationalistic political forces have risen in other countries too, as shown by Brexit.
This post written by Jeffrey Frankel.