The world faces 2017 all shook up. After the electoral upsets that kicked off with Britain’s vote to leave the European Union and culminated in Donald Trump’s victory in the U.S. presidential race, governments, companies and investors are confronted with uncertain and unfamiliar terrain.
The increasingly free flows of trade and capital that stretched across the planet over the past quarter century are in doubt. Two of the world’s oldest democracies, the United Kingdom and the United States, have been shocked by insurrections at the ballot box.
Faith in established political, corporate and financial leaders is at a nadir. Even the availability of the trustworthy information on which free societies depend can, it seems, no longer be taken for granted.
So it may seem foolhardy to try to predict the coming year. The task is an order of magnitude more difficult than it was twelve months ago. Then the idea of a President Trump seemed improbable – but not unimaginable. Indeed, Breakingviews anticipated that a sluggish economic recovery would damage Hillary Clinton’s chances of occupying the Oval Office, though we were less confident about the identity of her opponent.
Similarly, there was a clear possibility that Britain’s referendum on membership of the European Union might result in a vote to leave. That is why we included a fictional memo from a bank chief executive preparing to move staff out of the City of London in our 2016 Predictions book.
Other successes included our prognosis that Argentina would reach a settlement with bondholders. We foresaw that Western central banks would be cut down to size after stretching the limits of monetary policy. And though Caterpillar did not attract a public activist investor, it did placate shareholders by parting company with chief executive Doug Oberhelman.
The same crystal ball exercise today, however, involves considering a wide range of once-unthinkable events. What are the chances that Trump stumbles into a military standoff with China? What if the People’s Republic responds by aggressively devaluing its currency? How about the possibility that Russian President Vladimir Putin annexes a Baltic state? Or that a new Italian government defaults on the country’s debt and crashes out of the euro zone?
To be clear, none of these scenarios seem likely. But they are characterised by what former Bank of England Governor Mervyn King calls “radical uncertainty”: they are beyond measurement. These are precisely the types of risks that financial markets struggle to process. When presented with radical uncertainty, hope and fear – or denial – tend to take over.
This is visible in the early response to Trump’s election. Investors have cheered the prospect of large-scale tax cuts and spending on infrastructure, which they hope will boost growth and inflation. But we think that they will eventually have to discount the impact of Trump’s apparent indifference to the Constitution, or his willingness to pursue reckless diplomacy with Taiwan before inauguration.
We expect centrist parties in Europe to reassert themselves in elections in France and elsewhere, but only if they stop trying to appeal to everybody. Angela Merkel will win a fourth term as Germany’s chancellor, but will step down before it ends.
The merger boom will rumble on, if at a reduced pace, partly fuelled with cash repatriated by U.S. corporations. Large deals will increasingly fall foul of trustbusters or uppity shareholders. The Brazilian investors behind Anheuser-Busch InBev and Kraft Heinz, will target Mondelez International. Walt Disney and China’s Tencent are on the prowl.
As we approach the 10th anniversary of the beginning of the financial crisis, the banking sector remains out of kilter. Fragmenting regulations will make it even harder for cross-border lenders to earn adequate returns. Some European investment banks might decide that 2017 is the time to merge their Wall Street subsidiaries. Fund managers, meanwhile, will feel the kind of pay squeeze that bankers have been experiencing for years.
Yet for all the gloom, there are chinks of light. Despite Trump’s scepticism about global warming, market forces will keep renewable energy powered up. New drugs based on magic mushrooms will improve mental health, while the ability to treat genetic diseases by tinkering with DNA will go mainstream. Even Brexit will have a silver lining, prompting investment banks eager to move staff out of London to invest in new international schools.
Some of our predictions may prove wide of the mark, as in years past: Europe did not ditch the Schengen agreement that permits passport-free movement across the continent; Volkswagen’s top brass clung to their jobs; and HSBC decided not to move its head office from London, even though our analysis suggested that Hong Kong or Singapore would be better alternatives.
Despite these caveats, we hope that Predictions 2017 will be thought-provoking and fun to read – and offer some guidance in an increasingly shaken and uncertain world.