Brexit and US president Donald Trump dominated the headlines in a year when, normally, the business pages would have been full of stories about how the world economy suddenly and unexpectedly showed signs of life. It might be a bit of a stretch to use the words "economic boom" but there are certainly hints of one.
Even sclerotic old Europe showed signs of economic vigour, finally responding to years of unconventional monetary stimulus by the European Central Bank. Or maybe it’s just that what goes down must eventually come up.
Certainly the stock market has. Global stocks in 2017 are up about 20 per cent – and emerging markets by roughly 33 per cent – reaching levels that, in the US at least, are often described as "heady" or even "bubble-like". Indeed, on one popular measure of valuation, calculated by Nobel Prize-winning US economist Robert Shiller, US equities have exceeded current valuations only twice in recorded history.
Trump's hamfisted attempt at <a class="search" href='javascript:window.parent.actionEventData({$contentId:"7.1213540", $action:"view", $target:"work"})' polopoly:contentid="7.1213540" polopoly:searchtag="tag_event">tax reform</a> is thought likely to hand windfalls to those US firms with stacks of offshore cash
A lot of that stock market froth has come from just a few companies. A new acronym was born in 2017: Faang. That's Facebook, Apple, Amazon, Netflix and Google. For some of these companies at least, share prices zooming ever upwards have been accompanied by – or, more likely, driven by – rapidly increasing profits. That's got a lot of people worried. In the old days, supercharged profits would be a signal of monopoly power. And that usually means corporate collusion and ripped-off consumers.
Free services
In one of many ways that show the business world is not quite what it was, there is, in fact, little evidence of consumers being gouged by any of these companies. In many cases, quite the opposite: a lot of technology services are provided free.
We end up paying for them, of course, but in hidden ways. We may yet come to regret giving the likes of the Faangs our personal data for free. We may not mind the advertising which supplies most of their revenues but how our secrets get used by these businesses could well become a serious concern.
Even Apple, the most obvious example of a company that makes serious profits directly from consumers – the first $1,000 iPhone came accompanied by the usual fat profit margin – can justifiably lay claim to serious competitive pressures. Much cheaper phones that do at least as good a job as the iPhone are available but enough of us remain locked into the Apple ecosystem to keep demand healthy.
Corporate taxation, or the lack of it, remained a hot topic in 2017, just as it had done in previous years. Regulatory progress is slow but is inching towards taxing the juicy profits of the Faangs and other multinationals.
By contrast, Trump's hamfisted attempt at tax reform, due to be passed around the turn of the year, is thought likely to hand windfalls to all of those US companies with stacks of offshore cash. Whether it stimulates investment in the US economy – its avowed intention – remains to be seen. There are plenty of doubters and an equal number of harsh critics.
But the winds of change with regard to company taxes are blowing in one direction, at least in Europe. Facebook's decision to relocate some revenues out of Ireland, to be booked (and therefore taxed) closer to where sales take place, is actually not the first example of such a move but is a response to that changing climate. We will see how significant it proves to be, not least in terms of lost revenues to the Irish exchequer.
Tax reform – assuming it finally passes – has been Trump’s only substantive policy achievement. The failure of his healthcare reforms was accompanied by the significant omission – so far – of any big stimulus spending on infrastructure. Many observers took comfort from the fact that the promised trade war with China and the wall between the US and Mexico were both noticeable by their absence.
The hope is that Trump’s sound and fury will prove to be no more than hot air. The formal and informal checks and balances of the US constitution seem to be working. Now that the Republican majority in the Senate is wafer thin, it could prove even more problematic for the president to enact any more of his promised radical agenda.
More substantively, we began to see "normalisation" of monetary policy by the Federal Reserve. An announced change of leadership of the US central bank is due to take place next year. Two other important things happened. First, the Fed's balance sheet began, in a very small way, to shrink. That means it isn't printing nearly as much money as before. Second, US interest rates have started to rise, with more to come in 2018. That's mostly because the US economy is close to full employment.
Stagnant wages
Critics of the Fed concede that is true but point to the strangely quiescent labour market: by now, wages should have started to rise strongly. That’s clearly what the Fed is worried about but, like every central bank in the world, is faced with the conundrum of reasonably robust economic growth and relatively stagnant wages. Some economists think that the weird behaviour of wages and salaries means the Fed is making a big mistake.
That global economic renaissance was one reason why forecasts of a Brexit-induced recession in the UK proved wide of the mark. Small, open economies like buoyant export markets and a devalued currency.
A more nuanced story unfolded in the UK, one that could have prompted even hard-Brexiteers to sit up and take notice. With just about every economy in the world accelerating through the course 2017 the UK slowed down, at least relatively speaking.
At the same time, inflation refused to budge pretty much everywhere and, therefore, stayed noticeable by its absence, even in the face of all that growth. Except, again, in the UK. There, inflation has finished the year a whisker in excess of 3 per cent, causing real average earnings to fall, despite the economy running at full employment.
Latest estimates suggest the world economy will have grown by about 3.8 per cent this year, with every sign that it could be more in 2018. Momentum is strong as the year ends.
It is worth remembering that financial crises and economic recessions nearly always seem to come out of nowhere
That stands in stark contrast to the downbeat assessment published by the IMF towards the back end of 2016. Then, they downwardly revised their forecasts and could only be positive about prospects for growth in 2017 in emerging markets and developing economies. They completely missed the acceleration in European growth that was just starting and actually forecast 2017 growth for the euro zone to be less than in 2016 – which wasn’t much to start with. A growth renaissance will see the euro zone in fact grow by as much as a full percentage point higher than forecast by the Iinternational Monetary Fund.
To be fair to the IMF, most experts made similar errors. Even the European Commission had to play forecasting catch-up all year.
Economic forecasting, as we all know by now, is the ultimate mugs’ game. Cynics sometimes argue that the IMF should be taken as a classic contrary indicator: be upbeat when it is pessimistic and vice versa. So the opening words of the fund’s latest world economic outlook may actually sound a note of caution: “The global cyclical upswing that began midway through 2016 [which the IMF failed to spot] continues to gather strength.”
It is always worth remembering that financial crises and economic recessions nearly always seem to come out of nowhere. That said, most or all of the economic tea leaves currently point to a decent 2018.
Interest rates
With so much growth around, we might have expected interest rates to start to rise. With the notable exceptions of the US, the UK and Canada, that hasn’t really happened. The ECB continues with its policy of ultra-low interest rates and maintained its bond-buying programme. In Japan, where unconventional policy now sees the central bank buying equities, there was some speculation that there aren’t enough shares left in the open market to be bought. But those equity purchases did seem to have at least the desired effect – “Abenomics” is working, at least up to a point.
This was yet another year economists spent worrying about a Chinese slowdown – or even a debt implosion. On my reckoning, that’s the same as every year sine 1978. And, as in most of those years, the slump failed to materialise. Similar concerns are very much in evident for 2018. Who knows? Maybe it will happen one day soon but, if history is any guide, it would not be wise to bet on it.
Another new piece of jargon emerged in 2017, this time closer to home. “Leprechaun economics” was coined in response to changes in the measurement of GDP that meant interpreting domestic economic statistics became even more difficult than usual.
We think the underlying economy has grown by about 5 per cent with expectations for something similar, perhaps a bit less, in 2018.
“Fiscal space” is a more familiar term: there wasn’t much around in the most recent budget. But that growth background allied with arcane European Union budgeting rules mean the Minister for Finance could have much more wriggle room in next year’s budget. Which will make for an interesting economic and political dynamic: will Fianna Fáil judge it prudent to collapse the Government to prevent a “giveaway”, politically popular, budget at the back end of 2018?
