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31st July 2017, Brussels

World economy in the age of Trump

Robert Ward, Economist Intelligence Unit. © EDANAIn preparation for Outlook 2017, EDANA's General Manager, Pierre Wiertz, caught up with keynote speaker Robert Ward, Economist Intelligence Unit, to discuss the influence of technology and the impact of recent political upheaval on the global economy.

Pierre Wiertz: The election of Trump led many to fear instability and upheaval, but, in the US at least, there’s been a striking surge in economic optimism. What’s the medium-term prognosis?

Robert Ward: The US is undergoing one of the longest economic recoveries since the 2nd World war, which is quite extraordinary if you think how bad things were in the depth of the crisis. The US has actually being doing quite well in terms of job creation and budgetary reforms. But the recovery is starting to look a bit long in the tooth and we're expecting a slowdown in the US, a very small recession, in about 2019. Trump inherited an economy that was doing quite well in the round, but as I said, we are expecting a very mild recession in 2019, partly triggered by the age of the recovery but also the tightening US monetary policy which is ongoing.

PW: In terms of international implications, are the markets there following suit?

RW: Yes, I think there's a consensus that this recovery is nearing the end, we’re definitely closer to the next recession than the last. There will obviously be a global impact, because the world is very connected. Global growth will be slower by then and countries that rely on exports to the US will feel a bit of a chill. But it's important to emphasise that this is all just a minor 'correction' rather than a deeply structural fall like we had a decade ago.

The other one to watch is China, now in quite difficult territory, because their economic model has reached the end of its shelf life as the government tries to retool the economy towards private consumption. They also need to re-balance the substantial amount of debt in their economy. So, we're also expecting slower growth in China towards the end of this decade.

PW: The last twelve months saw a number of other widely discussed shocks on the global political stage. How deep has the economic impact been so far?

RW: Hmm, well we’ve seen a curious detachment between these shocks and a global economy that is actually still doing OK, 2017 is looking better than the global economy has looked for a very long time. What has changed is the increased risk from the political sphere: the centre of political risk is now found in the rich world, whereas previously less developed economies were the unstable ones.

In the US Trump is in a standoff with his opponents, putting policy on hold while political battles are fought, in the UK everything is subordinate to the travails of Brexit, and in the EU, even though the economy is generally doing well, there is quite a lot of concern about populism and this year's changes of government; Can Macron deliver and can Germany sustain current growth? And of course, we have the likes of Greece which is still struggling economically. We are not out of the woods by a long way. In the developed world, the risk of protectionism and unpredictable policies are the key issues hanging over the global economy at the moment. On the positive side, oil prices are set to remain pretty low at around $50 to $60 a barrel over the next couple of years, helping to cushion the blows and support any recovery.

PW: Whilst economic progress has undoubtedly drawn hundreds of millions out of absolute poverty in emerging countries, in Asia particularly, many industrialised countries seem to be struggling with a growing issue of both unqualified and highly qualified unemployment, and a growing income distribution issue. Is this a long-term problem?

RW: Yes, I think it's quite a deep-rooted problem. With income inequality, and there is much debate on this, people often get trapped at the bottom. With proportionally less wealth going to people with fewer qualifications and so on, priorities and opportunities change, with families having to remove children from full time education or forego university. This leads to a 'deskilling' of the workforce, affecting long-term productivity. Education reform in these developed economies is therefore key to long-term economic health. Obviously, socially, it is destabilising as well, as evidenced by Brexit and Trump. Globally however, more and more people are being lifted out of poverty, as we've seen in China, India, Nigeria and Brazil to name but a few.

PW: I'm glad you mentioned these regions. Recently, talk of BRICS and other emerging economies seems to have died down as China takes precedence. How do you see the evolution of the global economic ‘growth engines’?

RW: China is slowing. But it's the slowdown of an extremely large economy. So, even if they fall to 5% growth in GDP, that is still a huge amount of trade. So, China will continue to be important despite this deceleration. The US will ultimately give way at the top to China, but that's to be expected given the difference in population size.

An interesting one is India, now the world's fastest growing large economy, expanding at about 7 - 8% a year. However, I would add a note of caution there, as the rates should really be about double that to make real inroads into poverty. Brazil and Russia are starting to recover and are both showing growth. In the longer term, you can look at some of the bigger African countries like Ethiopia and Nigeria, although the latter will need to start a move away from their oil dependency.

PW:  There is an apparently unavoidable amount of coverage these days on the pace of change and the growing role of technology, particularly in how it may shape the nature of employment. Is anything different with the role of technology than in the past?

RW: Artificial intelligence and machine learning is absolutely one of the biggest disruptive technologies. You already see it my own industry for example, where simple news articles can be machine generated. A lot of traditional jobs will be lost in the shakeout as AI takes over, retail's move online is already having huge implications in that sector. But that's short term, what generally follows these technological leaps is the creation of another class of job. But I'm not sure that governments are giving this enough consideration just yet and, despite all the talk, it might take people by surprise once it starts playing out.

PW: Is the apparent decoupling of growth and job creation a reality? Economic stability and job creation used to go hand in hand. But a lot of recent tech-led growth doesn't appear to be spurring employment rates in the same way.

RW: Yes, a phenomenon we're seeing increasingly, which started in Japan, is the rise of part time contractors, the so-called ‘gig-economy’. In part that’s down to the crash of 2008, as companies are more reluctant to provide long term contracts, but the way people want to work is also changing, with increased mobility and flexibility attractive to many.  Alongside that, the export of a range of jobs from the rich world, coupled with the lack of educational reform I mentioned earlier, has led to a cohort of people being excluded from the workforce. This mismatch in skills and the needs of the marketplace is evidenced in areas with long term unemployment throughout both the US and Europe. 

PW: Climate change and its economic impact was absent, or rarely mentioned in the recent election debates in the US, UK France and Germany. Trump’s recent actions brought it to the front page again, but to what degree is it influencing policy globally? Has it been pushed down the agenda?

RW: I think your latter point is a big part of it. During the boom, there was simply more appetite (and funds) to focus on environmental initiatives and renewables. Since the crash, austerity measures, and a more complicated political landscape, have relegated this issue somewhat. But having said that, there is a growing realisation that action is needed, pollution in China is now a hot political issue for example. And I think this will increasingly be the case in other countries.

PW: Other Trump reversals have seen several trade agreements including the TTP and TTIP put in stasis or at least under review

RW: Indeed, the situation there is looking complicated, there's a certain degree of protectionism at the moment, but it's reactionary rather than actual policy. There simply are not as many votes for openness as you might have seen a decade ago. A mitigating factor against 1930s style protectionism is the fact the world is so connected now, global trade is more resilient to protectionism. Trade is finding a way despite the difficulties and that’s very encouraging.

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