As tempting as it is to dwell on current financial and macroeconomic conditions, doing so risks obfuscating a key element in the outlook for the future. There is a curious contrast between the relative clarity of expectations for the near term and the murkiness and uncertainty that comes when one extends the horizon further – say, to the next five years. Many countries are facing structural uncertainties that could have far-reaching, systemic implications for markets and the global economy. For example, over the next five years, the European Union will seek to establish a new working relationship with the United Kingdom, while also dealing with the harmful social and political effects of slow, insufficiently inclusive growth. The EU will have to navigate the perils of a prolonged period of negative interest rates, while also shoring up its economic and financial core. As long as the eurozone’s architecture is incomplete, consistent risks of instability will remain. Moreover, in the years ahead, the United States, having notably outperformed many other economies, will decide whether to continue disengaging from the rest of the world – a process that is at odds with its historical position at the center of the global economy. Or consider China’s development process. With the global economy acting more as a drag on growth than a boon to it, China may confront the risk that it has overplayed its hand. Heavy reliance on short-term stimulus measures is increasingly inconsistent with pursuing the longer-term
reforms that it needs, and its geopolitical ambitions and regional economic and financial commitments (including the Belt and Road Initiative) are becoming costlier. Most important, in the next five years, China and the U.S., the world’s two largest national economies, will have to navigate an increasingly narrow path as they try to secure their own interests while avoiding an outright confrontation. Such fluidity clouds the economic, financial, institutional, political, and/or social outlook for other countries. Today’s macroeconomic and geopolitical uncertainties will amplify those fueled by technological disruptions, climate change, and demographics. And they will raise questions about the functioning and resilience of the global economy and markets. This degree of uncertainty is particularly notable in the multidecade context of globalization. In recent years, the stability that comes with broad-based adherence to the rules-based international order has been considerably weakened, as has the power of central banks to repress financial volatility and buy time for the real economy. Left unmanaged, these medium-term structural trends would set the stage for greater political and social fragmentation, and raise the specter of secular de-globalization. If there is one thing that neither the global economy nor markets are wired for, it is a prolonged and deepening rupture in cross- border economic and financial relations. Were such a new paradigm to materialize, today’s trade, investment, and currency tensions would intensify and spill over to the realm of national security and geopolitics.
20
January 2020
Made with FlippingBook Learn more on our blog