Radical Uncertainty, Political Risk, and Forecasting the Global Economy

Constant GDP per capita for the World FRED St Louis Fed

Should we expect 2017 to be different than 2016 as far as global economic growth is concerned?

As Gian-Maria Milesi-Ferreti said yesterday, it surely ought to be better because it will be unlikely to be as bad as 2016 was for Russia, Nigeria, South Africa, and Brazil. The anti-productivity shock of BREXIT will not have hit the world economy yet, and Mark Carney and company have managed to drop the pound enough that Britain looks likely to see expenditure-switching rather than expenditure-dropping as people readjust their plans as they wonder what the end of the BREXIT imbroglio will be.

And China will stretch out its current policies and so avoid shocking the world economy until after the 19th Party Congress.

But then there is TRUMPET. Maybe there will be a normal rather than a Berlusconi-style infrastructure-heavy fiscal stimulus, which has the potential to do substantial good. Certainly there will be large tax cuts for billionaires and millionaires, which will do next to no good for production and employment at all.

But if there is going to be a very big difference between 2016 and 2017, it will be that political risk that seemed manageable at the start of 2016 will no longer seems manageable by the middle of 2017. So wealth holders of all kinds will be focused on diversification:

  • diversify where your operations are,
  • diversify where your wealth is,
  • diversify where your lineage lives,
  • diversity the passports your lineage holds.

The United States did not use to be a place where losing presidential candidates where threatened with jail. Now the U.S. appears to have become such a country.

That has to concentrate everybody's mind.

That has to make it less likely that people will extend themselves to take on economic business expansion risks. They will already see themselves as having more than enough political risk on their plate. Safety rather than productivity growth has got to be the watchword.

How large an impact will this have? I do not know. But I am less optimistic about the global economy going forward than I was nine days ago.