Open trading account 
Anders Borg, Sweden’s former Finance Minister, gives his perspective on what to look out for in the economic year ahead, from reforms in China to the threat of Brexit.
2016 will be a challenging and difficult year for the global economy.Global growth is picking up somewhat after a number of weak years. A global GDP growth rate of 3.5%, the latest IMF forecast, is lower than the 4.5% average that preceded the decade before the great recession, but it is better than the average over the past five years.
The US and UK recoveries are self-sustained, but weaker than during a normal post-crisis period. In the Eurozone, expansionary policy is still called for and further steps to support growth could be expected. In the US and Europe alike, investments levels are low, productivity growth is very weak and the export sector is only providing a small contribution to the recovery. At the same time growth is slowing in Asia and world trade is likely to grow at a slower rate than GDP. It is a recovery without a real upturn in the business cycle, threatened by a range of factors.1) The year of political populism
2016 could become a year marked by political populism. Weak economic activity and low productivity growth mean that real wages and consumption are likely to continue to be disappointing. When reality is coming short of expectations, there are grievances to be exploited. Donald Trump, Jeremy Corbyn, Alexis Tsipras, Nigel Farage, Marine Le Pen, Bernie Sanders, Pablo Iglesias Turrión and many others are taking advantage of stagnating living standards and increasing economic insecurity.
A number of factors are reinforcing populism and discontent. Job security is undermined by global competition, digitalisation and robotisation. New work opportunities ahead are more likely to be short-term contracts, part-time jobs, self-employment without full social benefits and full job security. The so-called “Uber” class of insecure workers is a new reality to be dealt with. The demands for education, expert knowledge and social skills have taken a quantum leap upwards and increased the threshold for people seeking to enter the labour market. Unionisation is on the retreat. Increased insecurity in labour markets, the weaker negotiation power of the unions and low productivity are setting narrow limitations for wage negotiations and real wages.
In a period when most advanced economies needs strong governments to implement far-reaching structural reforms, voters are favouring short-termism and asking for simple solutions. To restore political trust, governments needs to deliver real wage increases, more jobs and better welfare. This can only happen if growth is revitalised by reforms to increase labour market flexibility and to improve the business climate.
There is a clear risk that the fear of political populism will undermine the way leaders deal with long-term challenges and thereby creates a vicious negative spiral where disappointment further weakens trust in governments.
2) Global insecurity and the refugee crisis
US presidential elections will be a major political event during 2016. From a global perspective, the key issue is whether the next president will be able to restore the US as a global force for stability after the apparent lethargy of President Obama’s administration. Another period of a United States that lacks direction in its foreign policy, combined with a reluctance to engage with military forces in difficult regions, will create deep security problems.
Europe needs to step up its ability to deal with emerging security issues, although that is an unlikely outcome without leadership from the USA. The tragic events in Paris have created a momentum for a coalition bringing the US, France, the United Kingdom and, unexpectedly, also Russia together for a push-back of the Daesh ambition of establishing a Caliphate. It seems necessary for the US and Europe to be ready to actively counter extremist Islamic terrorism in the Middle East, North Africa and Afghanistan in the medium term as well as in the long run. To leave large areas and regions under the control of Daesh, Boko Haram, Al-Shabaab or the Taliban is a global security risk.
The refugee crises in Europe will remain a major factor during 2016. UN estimates indicate that over one million people have entered Europe with the intention of claiming asylum during 2015. On a global level, UNHCR has stated that the number of forcibly displaced people reached almost 60 million in 2015, an increase of some 40% since 2014.
Germany, Sweden, Hungary, Austria and Italy have been the most affected countries in Europe (Hungary and Sweden with the highest per capita numbers, and Germany with the highest number in absolute terms). In the last few weeks, the inflows have decreased. Partly that could be due to temporary harsh weather. The fact that the European Union has made a broader political agreement with Turkey could also be a factor.
In addition, Daesh will face a stronger counter insurgency efforts during 2016. If Daesh is pushed back and insecurity reduced in Syria and Iraq that is likely to further improve the situation. It should however be pointed out that some 4 million refuges from the conflict in Syria-Iraq remain in the neighbouring countries (in Turkey 2.2 million, in Lebanon 1.1 million and in Jordan 650,000 people).
The historical pattern has been that it takes a few years before the refugee numbers normalise after a period of conflict. The intensified challenge from the Taliban in Afghanistan could also increase the number of people claiming asylum in Europe (about 100,000 people have come from Afghanistan to Europe during 2015). The number of refugees coming to Europe is most likely going to be lower in 2016, but they will remain much higher than the long-term average for both 2016 and 2017.
The short term economic consequence of the high migration flows will be somewhat higher GDP growth in Germany and Sweden, due to a temporary increase in public expenditure. The consequences of a growing population is positive in the long term, reducing the demographic pressure of an ageing population. Increased internal globalisation, to use the term coined by Angela Merkel, is potentially a more diversified work force and a more creative economy.
In the short term, the task of integrating such a large number of people will be a challenge. In Sweden the historical experience has been that people from Syria have integrated well into the labour market. However, to be able to integrate a large number of people coming from a much less developed country (GDP per capita in Syria was 5000 USD before the conflict, which is slightly more than 10% of the level in Sweden and Germany) will be complicated. To strengthen integration, countries need to increase labour market flexibility, boost spending on early education efforts and active labour market measures and streamline welfare services, but both in Germany and Sweden this will be very difficult. Looking ahead it is likely that unemployment will be somewhat higher in 2017 and 2018. and this will dampen wage pressure and inflation pressure somewhat.
3) The referendum on Brexit
A key factor shaping Europe’s political future in the decades to come is the referendum on the UK’s membership of the EU. Referendums always come with uncertainty. Unexpected events can push the results in any direction. The best guess is that the United Kingdom remains in the European Union. The economic and political consequences of a British move towards isolationism are devastating.
The political balance in Europe would shift from the idea of a Europe open to free trade and dynamic markets, turning the balance towards a more bureaucratic and centralising perspective. Europe and the UK would both be in a much worse position in the competition with the United States, China, Japan and India. For the UK, the long-term economic consequences are likely to be deeply concerning. Without full participation in the European Union, London’s role as the financial centre of Europe would sooner or later be put into question. The populists are creating the impression that it is costless for the UK to move away from Europe, but that is a dangerous illusion. The Danish referendum set off a wave of financial turmoil back in 1992 and the implications of Brexit would be more far-reaching.
One factor to bear in mind is that voters often seems to favour the status quo when uncertainty is high. When almost all economic experts, the traditional political parties and the larger parts of the business sector are arguing for a “yes”, this should be the most likely outcome, but in the age of populism uncertainty remains high until the ballots have been counted.
4) Russia’s role in the world
Another political factor contributing to financial uncertainty is Russia. At the end of 2015, President Putin has rapidly repositioned Russia from being the outsider rocking the boat to a constructive force dealing with Daesh in Syria and Iraq. The repositioning is obviously fragile. Putin has in no way backed down in principle from the aggressive stance in the conflict in eastern Ukraine. So far the Russian intervention seems to have provided more support for President Al-Assad than actual damage to Daesh.
In the long run, Russia is likely to be a declining power under the current regime. Low fertility rates and premature alcohol-related death among men, combined with excessive dependence on natural resources rather than productivity and innovations, are undermining the long-term prospects. But in the short run, any neighbouring country that shows signs of weakness face the risk that Russia will try to exploit the situation. President Putin has been a master of navigating the age of populism and could revert to the anti-western rhetoric at any point of time.
For the coming years investments in Russia will be perceived as risky. A solid recovery in Russia will only come if foreign investors become convinced that the U-turn in Russian politics of late 2015 is the first step towards a Russia that is open for co-operation and ready to reform its archaic economic structures. Until then most investors will hibernate and hope for a thawing in the Russian tundra.
5) Weak growth, choppy markets
Global growth will be weak next year. Furthermore, we are also likely to see substantial turmoil in financial markets. The combination of the recovery in the US and, even if weaker, in Europe, as well as a deceleration of growth in China is creating uncertainty for the financial markets. The extraordinary monetary policy measures over the last few years have pumped short-term money into the global financial system. In combination with low liquidity in markets, partly due to the new regulatory structures that are reshaping banking everywhere, this has set the tone for turbulence.
The key factor deciding the degree of turbulence will be inflation in the US and reforms in China. If inflation is picking up in the US and the Federal Reserve is perceived to be behind the curve, this could push US rates higher and reinforce the appreciation of the dollar. The best guess is that inflation will remain subdued in the US. A weak consumer recovery and very low resource utilisation is unlikely to give a demand-driven inflation push. The potential for accelerated productivity growth out of the broad technology-driven shift that is now taking place should also keep cost pressure under control.
The traditional models that the Federal Reserve and other central banks are using to forecast inflation are backward-looking and are unlikely to capture the fast moving technological development that we are now seeing. On the back of higher than expected productivity it is also possible for the unemployment rate to gradually go lower without pushing a traditional wage and inflation spiral.
2016 could potentially be a year when the implications of the digital transformation become a dominant theme. The potential is clearly there. Many start-up companies have been printing very strong growth numbers for years, but the macro-economic impact has so far been on the weaker side because the growth has come from a low level. Every year this is gradually changing. When more and more people do their shopping and banking online that will also mean that the broader implications becomes more pronounced. The pressure on existing firms to adapt to increased competition is likely to mean that prices and profit margins are being squeezed.
A more problematic impact could be that employment growth is held back during the recovery. So far that has not been the case in the advanced economies. The labour market in the US has been strong, but that has also been the trend in the United Kingdom, Germany and the Nordic countries.
6) China’s reforms
If inflation expectations in the US are a key factor shaping the financial year of 2016, reforms in China are on another scale. If China is able to gradually move forward with rebalancing the economy from investments to consumption, that could open a path towards more sustainable growth and a gradual return of optimism in the Chinese business sector.
The Chinese government has many times, not least at the last meeting in Davos and at the Dalian summit, stated its ambition to push forward with reforms to open the economy and continue the transformation towards a well-functioning market economy. The downside risk seems to be that these reforms are dependent on the ability to deal with resistance from special interest groups, including state-owned enterprises and more conservative centres of power. For the global economy, it is key to monitor any sign that reforms are being accelerated and that resistance to change is being pushed backwards.
Any sign that a credit contraction is hampering growth would imply that it is necessary for the People’s Bank of China, PBOC, to push monetary policy in an expansionary direction. In such a scenario, the RMB would weaken and that would imply second round depreciation in the rest of Asia. In any such scenario we would also see continued turbulence on commodity markets as well. Commodity prices are likely to contribute to the low-inflation environment. It will take time before we see the recovery of the super-cycle.
It is important to underline how important China is for the rest of the emerging market countries. Growth in Asia, Latin America and Africa has been bolstered by the growing demand for iron ore, copper and oil from China. If China succeeds in dealing with domestic challenges, that would also contribute to reviving optimism in emerging markets.
It is, however, important to underline that the renaissance in emerging markets has a more fundamental basis than just being derivative of China. India, Indonesia, Bangladesh, the Philippines, Brazil, Mexico Colombia, Nigeria, Ethiopia and East Africa have been able to accelerate growth out of their own power. Political reforms have improved governance. Barriers to trade have been reduced. The regulatory burden and the cost of doing business have been reduced. The education level of the workforce has improved. The mobile revolution has made information accessible almost everywhere and increased political transparency.
Emerging economies will be under market pressure during 2016. If the Federal Reserve accelerates rate hikes and the PBOC depreciates the RNB this would create tensions for the global economy. In this rather difficult environment, it would be a critical moment if external pressure translated into a push for economic reforms. If the governments in Brazil, Turkey, Nigeria or Russia would see market pressure as an argument for reinforcing structural reforms that could be game changer. So far the response has been far from convincing.
It is important to take on board the fundamental optimism that globalisation is bringing to emerging markets. According to the IMF forecast for 2016 there will be more than 3.4 billion people living in countries with a GDP growing faster than 6%. A growth rate of 6% means that the total economy will triple in two decades. That is the fastest transformation out of poverty that humanity has ever experience. Whether 2016 will bring a revival of the fundamental emerging market story or a year of disappointment is an open question, and the more market pressure is seen as an argument for reform the better the outcome will be.
016 is likely to be a difficult year. Growth is increasing, lead by the recovery in the US and other advanced economies, but populism, geopolitical risks and market turmoil are likely to cast some shadows over the optimism.
2016 will be a challenging and difficult year for the global economy.Global growth is picking up somewhat after a number of weak years. A global GDP growth rate of 3.5%, the latest IMF forecast, is lower than the 4.5% average that preceded the decade before the great recession, but it is better than the average over the past five years.
The US and UK recoveries are self-sustained, but weaker than during a normal post-crisis period. In the Eurozone, expansionary policy is still called for and further steps to support growth could be expected. In the US and Europe alike, investments levels are low, productivity growth is very weak and the export sector is only providing a small contribution to the recovery. At the same time growth is slowing in Asia and world trade is likely to grow at a slower rate than GDP. It is a recovery without a real upturn in the business cycle, threatened by a range of factors.1) The year of political populism
2016 could become a year marked by political populism. Weak economic activity and low productivity growth mean that real wages and consumption are likely to continue to be disappointing. When reality is coming short of expectations, there are grievances to be exploited. Donald Trump, Jeremy Corbyn, Alexis Tsipras, Nigel Farage, Marine Le Pen, Bernie Sanders, Pablo Iglesias Turrión and many others are taking advantage of stagnating living standards and increasing economic insecurity.
A number of factors are reinforcing populism and discontent. Job security is undermined by global competition, digitalisation and robotisation. New work opportunities ahead are more likely to be short-term contracts, part-time jobs, self-employment without full social benefits and full job security. The so-called “Uber” class of insecure workers is a new reality to be dealt with. The demands for education, expert knowledge and social skills have taken a quantum leap upwards and increased the threshold for people seeking to enter the labour market. Unionisation is on the retreat. Increased insecurity in labour markets, the weaker negotiation power of the unions and low productivity are setting narrow limitations for wage negotiations and real wages.
In a period when most advanced economies needs strong governments to implement far-reaching structural reforms, voters are favouring short-termism and asking for simple solutions. To restore political trust, governments needs to deliver real wage increases, more jobs and better welfare. This can only happen if growth is revitalised by reforms to increase labour market flexibility and to improve the business climate.
There is a clear risk that the fear of political populism will undermine the way leaders deal with long-term challenges and thereby creates a vicious negative spiral where disappointment further weakens trust in governments.
2) Global insecurity and the refugee crisis
US presidential elections will be a major political event during 2016. From a global perspective, the key issue is whether the next president will be able to restore the US as a global force for stability after the apparent lethargy of President Obama’s administration. Another period of a United States that lacks direction in its foreign policy, combined with a reluctance to engage with military forces in difficult regions, will create deep security problems.
Europe needs to step up its ability to deal with emerging security issues, although that is an unlikely outcome without leadership from the USA. The tragic events in Paris have created a momentum for a coalition bringing the US, France, the United Kingdom and, unexpectedly, also Russia together for a push-back of the Daesh ambition of establishing a Caliphate. It seems necessary for the US and Europe to be ready to actively counter extremist Islamic terrorism in the Middle East, North Africa and Afghanistan in the medium term as well as in the long run. To leave large areas and regions under the control of Daesh, Boko Haram, Al-Shabaab or the Taliban is a global security risk.
The refugee crises in Europe will remain a major factor during 2016. UN estimates indicate that over one million people have entered Europe with the intention of claiming asylum during 2015. On a global level, UNHCR has stated that the number of forcibly displaced people reached almost 60 million in 2015, an increase of some 40% since 2014.
Germany, Sweden, Hungary, Austria and Italy have been the most affected countries in Europe (Hungary and Sweden with the highest per capita numbers, and Germany with the highest number in absolute terms). In the last few weeks, the inflows have decreased. Partly that could be due to temporary harsh weather. The fact that the European Union has made a broader political agreement with Turkey could also be a factor.
In addition, Daesh will face a stronger counter insurgency efforts during 2016. If Daesh is pushed back and insecurity reduced in Syria and Iraq that is likely to further improve the situation. It should however be pointed out that some 4 million refuges from the conflict in Syria-Iraq remain in the neighbouring countries (in Turkey 2.2 million, in Lebanon 1.1 million and in Jordan 650,000 people).
The historical pattern has been that it takes a few years before the refugee numbers normalise after a period of conflict. The intensified challenge from the Taliban in Afghanistan could also increase the number of people claiming asylum in Europe (about 100,000 people have come from Afghanistan to Europe during 2015). The number of refugees coming to Europe is most likely going to be lower in 2016, but they will remain much higher than the long-term average for both 2016 and 2017.
The short term economic consequence of the high migration flows will be somewhat higher GDP growth in Germany and Sweden, due to a temporary increase in public expenditure. The consequences of a growing population is positive in the long term, reducing the demographic pressure of an ageing population. Increased internal globalisation, to use the term coined by Angela Merkel, is potentially a more diversified work force and a more creative economy.
In the short term, the task of integrating such a large number of people will be a challenge. In Sweden the historical experience has been that people from Syria have integrated well into the labour market. However, to be able to integrate a large number of people coming from a much less developed country (GDP per capita in Syria was 5000 USD before the conflict, which is slightly more than 10% of the level in Sweden and Germany) will be complicated. To strengthen integration, countries need to increase labour market flexibility, boost spending on early education efforts and active labour market measures and streamline welfare services, but both in Germany and Sweden this will be very difficult. Looking ahead it is likely that unemployment will be somewhat higher in 2017 and 2018. and this will dampen wage pressure and inflation pressure somewhat.
3) The referendum on Brexit
A key factor shaping Europe’s political future in the decades to come is the referendum on the UK’s membership of the EU. Referendums always come with uncertainty. Unexpected events can push the results in any direction. The best guess is that the United Kingdom remains in the European Union. The economic and political consequences of a British move towards isolationism are devastating.
The political balance in Europe would shift from the idea of a Europe open to free trade and dynamic markets, turning the balance towards a more bureaucratic and centralising perspective. Europe and the UK would both be in a much worse position in the competition with the United States, China, Japan and India. For the UK, the long-term economic consequences are likely to be deeply concerning. Without full participation in the European Union, London’s role as the financial centre of Europe would sooner or later be put into question. The populists are creating the impression that it is costless for the UK to move away from Europe, but that is a dangerous illusion. The Danish referendum set off a wave of financial turmoil back in 1992 and the implications of Brexit would be more far-reaching.
One factor to bear in mind is that voters often seems to favour the status quo when uncertainty is high. When almost all economic experts, the traditional political parties and the larger parts of the business sector are arguing for a “yes”, this should be the most likely outcome, but in the age of populism uncertainty remains high until the ballots have been counted.
4) Russia’s role in the world
Another political factor contributing to financial uncertainty is Russia. At the end of 2015, President Putin has rapidly repositioned Russia from being the outsider rocking the boat to a constructive force dealing with Daesh in Syria and Iraq. The repositioning is obviously fragile. Putin has in no way backed down in principle from the aggressive stance in the conflict in eastern Ukraine. So far the Russian intervention seems to have provided more support for President Al-Assad than actual damage to Daesh.
In the long run, Russia is likely to be a declining power under the current regime. Low fertility rates and premature alcohol-related death among men, combined with excessive dependence on natural resources rather than productivity and innovations, are undermining the long-term prospects. But in the short run, any neighbouring country that shows signs of weakness face the risk that Russia will try to exploit the situation. President Putin has been a master of navigating the age of populism and could revert to the anti-western rhetoric at any point of time.
For the coming years investments in Russia will be perceived as risky. A solid recovery in Russia will only come if foreign investors become convinced that the U-turn in Russian politics of late 2015 is the first step towards a Russia that is open for co-operation and ready to reform its archaic economic structures. Until then most investors will hibernate and hope for a thawing in the Russian tundra.
5) Weak growth, choppy markets
Global growth will be weak next year. Furthermore, we are also likely to see substantial turmoil in financial markets. The combination of the recovery in the US and, even if weaker, in Europe, as well as a deceleration of growth in China is creating uncertainty for the financial markets. The extraordinary monetary policy measures over the last few years have pumped short-term money into the global financial system. In combination with low liquidity in markets, partly due to the new regulatory structures that are reshaping banking everywhere, this has set the tone for turbulence.
The key factor deciding the degree of turbulence will be inflation in the US and reforms in China. If inflation is picking up in the US and the Federal Reserve is perceived to be behind the curve, this could push US rates higher and reinforce the appreciation of the dollar. The best guess is that inflation will remain subdued in the US. A weak consumer recovery and very low resource utilisation is unlikely to give a demand-driven inflation push. The potential for accelerated productivity growth out of the broad technology-driven shift that is now taking place should also keep cost pressure under control.
The traditional models that the Federal Reserve and other central banks are using to forecast inflation are backward-looking and are unlikely to capture the fast moving technological development that we are now seeing. On the back of higher than expected productivity it is also possible for the unemployment rate to gradually go lower without pushing a traditional wage and inflation spiral.
2016 could potentially be a year when the implications of the digital transformation become a dominant theme. The potential is clearly there. Many start-up companies have been printing very strong growth numbers for years, but the macro-economic impact has so far been on the weaker side because the growth has come from a low level. Every year this is gradually changing. When more and more people do their shopping and banking online that will also mean that the broader implications becomes more pronounced. The pressure on existing firms to adapt to increased competition is likely to mean that prices and profit margins are being squeezed.
A more problematic impact could be that employment growth is held back during the recovery. So far that has not been the case in the advanced economies. The labour market in the US has been strong, but that has also been the trend in the United Kingdom, Germany and the Nordic countries.
6) China’s reforms
If inflation expectations in the US are a key factor shaping the financial year of 2016, reforms in China are on another scale. If China is able to gradually move forward with rebalancing the economy from investments to consumption, that could open a path towards more sustainable growth and a gradual return of optimism in the Chinese business sector.
The Chinese government has many times, not least at the last meeting in Davos and at the Dalian summit, stated its ambition to push forward with reforms to open the economy and continue the transformation towards a well-functioning market economy. The downside risk seems to be that these reforms are dependent on the ability to deal with resistance from special interest groups, including state-owned enterprises and more conservative centres of power. For the global economy, it is key to monitor any sign that reforms are being accelerated and that resistance to change is being pushed backwards.
Any sign that a credit contraction is hampering growth would imply that it is necessary for the People’s Bank of China, PBOC, to push monetary policy in an expansionary direction. In such a scenario, the RMB would weaken and that would imply second round depreciation in the rest of Asia. In any such scenario we would also see continued turbulence on commodity markets as well. Commodity prices are likely to contribute to the low-inflation environment. It will take time before we see the recovery of the super-cycle.
It is important to underline how important China is for the rest of the emerging market countries. Growth in Asia, Latin America and Africa has been bolstered by the growing demand for iron ore, copper and oil from China. If China succeeds in dealing with domestic challenges, that would also contribute to reviving optimism in emerging markets.
It is, however, important to underline that the renaissance in emerging markets has a more fundamental basis than just being derivative of China. India, Indonesia, Bangladesh, the Philippines, Brazil, Mexico Colombia, Nigeria, Ethiopia and East Africa have been able to accelerate growth out of their own power. Political reforms have improved governance. Barriers to trade have been reduced. The regulatory burden and the cost of doing business have been reduced. The education level of the workforce has improved. The mobile revolution has made information accessible almost everywhere and increased political transparency.
Emerging economies will be under market pressure during 2016. If the Federal Reserve accelerates rate hikes and the PBOC depreciates the RNB this would create tensions for the global economy. In this rather difficult environment, it would be a critical moment if external pressure translated into a push for economic reforms. If the governments in Brazil, Turkey, Nigeria or Russia would see market pressure as an argument for reinforcing structural reforms that could be game changer. So far the response has been far from convincing.
It is important to take on board the fundamental optimism that globalisation is bringing to emerging markets. According to the IMF forecast for 2016 there will be more than 3.4 billion people living in countries with a GDP growing faster than 6%. A growth rate of 6% means that the total economy will triple in two decades. That is the fastest transformation out of poverty that humanity has ever experience. Whether 2016 will bring a revival of the fundamental emerging market story or a year of disappointment is an open question, and the more market pressure is seen as an argument for reform the better the outcome will be.
016 is likely to be a difficult year. Growth is increasing, lead by the recovery in the US and other advanced economies, but populism, geopolitical risks and market turmoil are likely to cast some shadows over the optimism.
