2018 has surprised. The 2017 year had come to the end in good conditions. It was “planets alignment” with a very low oil price, interest rates near zero and a favorable global environment. French growth reached its highest level for a long time: during 2017 2nd half, it had been near 3%, on annualized rate. That did not last. International tensions increased all along the year with the promise of a trade war between China and the U.S., an unprecedented hostility of the American president toward Europe and a brutal rebound of oil prices. Inflation was making a modest comeback and central banks were starting to abandon their expansionist policies. The ECB announced the end of its program consisting in buying bonds but it will continue to reinvest the amount it will receive when these bonds come at maturity. The Federal Reserve increased four times its interest rates.
The year has had a very bad end. The overall economic situation made a turnaround and political uncertainties increased. The concomitance of these two phenomena has generated a severe fall of financial markets during the final weeks. In most of the democratic countries, the current leaders have been sharply disputed: in France, with the “gilets jaunes” movement, and in the U.K. with the Brexit. Ruling governments have lost elections (Italy, Sweden, and the U.S. with a Democrat majority at the House) or have emerged weaker (Germany). Only Japan has kept stability with the Shinzo Abe reelection at the head of his party in October after having won the snap elections in 2017. Will this financial instability increase in 2019, or is it coming from the waking up to the exceptionally length of the economic cycle which followed the 2007-2008 crisis and from the financial markets volatility which was increased by the generalizing utilization of algorithms? In puting up transactions volumes, they amplify market reactions.
The threat of a trade war between China and the U.S. should fade. The American president knows he cannot fight with everybody in the same time. In his country, he is going to be confronted to tense relations with the Congress and to the threat of the prosecutor Mueller inquiry which weight on him. The business community, and Wall Street fall shows it, is hostile to the reestablishment of heavy duties on Chinese products imports because American companies for a long time have organized their supply chains with localization in China of some shares of their production. Experience has shown, notably during the North Korea crisis, that Donald Trump is capable to make 180° turnaround. We can also rely on Beijing to find a compromise which will allow him to save his face and to appear, against evidence, as the winner in that confrontation.
A crisis in the United kingdom, with the dissolution of the House of Commons or a new referendum is also unlikely on the short term. The strategy, adopted by the two parties in discussion, Theresa May and Michel Barnier, would permit to avoid it. It consists in permanently delaying the conclusion of a new agreement when this one is impossible to achieve. The issue is, then, put in reserve and they declare they have found an agreement on all issues except on some points which are set aside and they promise they will be solved later. That is procrastination. One question remains. Will the United Kingdom organize elections in May to appoint its members of the European Parliament if no real agreement is signed? These elections will obviously be marked by a rise of the populist and anti-European parties. But except in the media where they will occupy the headlines that will not have any consequences because the large coalition which will bring together, depending of the submitted bills, the other parties will still have by large the majority.
The political situation in France will continue to slowly deteriorate. The large “debate between citizens” allows to getting some time during which the movement of revolt will exhaust itself. At the end it will not get new rewards from the government and it will be the object of a growing recuperation from far-left and far-right political groups, which will lead to its breaking up. But the current majority will not remain unscathed. Its unity, especially in the National Assembly, will appear more and more superficial and divisions could stand out. A clarification would then be unavoidable. It would have, as a consequence, the return toward right and left parliamentary groups, according to each ones choices, of a significant number of elected deputies belonging to the “Republique en marche”.
These political uncertainties will weight on economic activity in every country. 2019 will see a significant slowdown of the world growth but it is unlikely that a systemic crisis as in 2007-2008, happens again except if one of the “GAFA” would crash, generating a market chain reaction with its consequences on the real economy. Real interest rates will remain very low and even negative as in Europe, due to the global disequilibrium between financial savings superior to the needs to finance economic agents including States. But situations will be very different between countries. Financial markets will be in charge of orientating the surplus of some zones (Europe, China, Japan) to finance the deficits of the other ones (U.S., U.K., Latin America), which, due to an uncertain political context, will increase their volatility and provoke tensions.
After their short-lived rebound during autumn, fossil fuels prices will remain low and contribute to the maintenance of a low inflation in developed countries. Growth slowing will affect demand. Major innovations in natural gas and oil production which appeared during the last ten years will continue to bear fruits through an increase of the available reserves. So China has developed a new technology to extract natural gas through volcanic stratum and has just put it in activity in the Sichuan province. The conversion of coal to natural gas power-plants will accelerate in the country as in the U.S. and will contribute to the reduction of greenhouse emissions. Europe, due to Poland and Germany stubbornness, will not more comply in 2019 than in 2018 to its climate commitments.
Slower economic growth but foreseeable détente between the U.S. and China and political uncertainties almost everywhere in the world, so are the characteristics of the New Year. The upholding of very low interest rates along with an increased volatility of financial markets will create an original context but the risk of a major global crisis as ten years ago is low. In France, this environment will not help to address the current difficulties but it shouldn’t be used as an excuse to refuse to take the necessary decisions. The “in the same time” philosophy leads nowhere. It is not possible to do everything and the opposite. It will be necessary to choose the way. But you must have the will as, one day, has said Lao Tseu: “Where is the will, is the way”.