Last year marked the dress rehearsal for major political and economic shifts. In 2017 the curtain goes up for the real show. The UK vote to leave the European Union, the election of Donald Trump, and Italy’s rejection of constitutional reform proposals were serious disturbances; the first two were genuine shocks. This year the electorates’ decisions take effect. As our new year forecasts show, advanced economies will remain strong sources of potential instability. However, we devote the cover story of the first Bulletin for 2017 to emerging market economies, which could be heavily affected by the developed economies’ problems, but still represent a valuable opportunity for investors to diversify risk and profit from the world’s best growth opportunities. In the debt-fuelled booms and busts that started with the US-driven financial crisis and continued with Europe’s debt upsets, emerging markets could be hit next. Years of ultra-low rates in advanced economies motivated huge capital inflows into emerging markets. But the Fed is changing course and will raise rates at least three times this year, predicts Darrell Delamaide. This creates vulnerabilities in emerging markets both directly, in terms of capital outflows, and indirectly, through dollar appreciation. China’s slowdown and debt problems bring more uncertainty. Exposure varies widely by region and country. David Mann emphasises the important trade and financial linkages between Asia and the US and suggests that the adjustment to higher US rates will come mainly through exchange rates. Phyllis Papadavid highlights how tighter Fed policy poses difficulties for financing infrastructure projects in Africa. The longer-term outlook for the continent is mixed. Mthuli Ncube points to the huge potential of digital financial services, while Danae Kyriakopoulou explains constraints from Africa’s productivity puzzle.
In the monthly Focus containing the Advisory Board’s predictions, we opine that many of the biggest shock waves will originate in the US as Trump enters the White House. Tensions in global geopolitics, particularly in Asia and the Middle East, create substantial risks. A shift in the economic mix from monetary to fiscal policy threatens global bond markets and could also be suboptimal for the US economy, notes Steve Hanke. Despite rising inflation, US-style tightening is unlikely elsewhere. As John Mourmouras argues, central banks are independent but they are also interdependent with other areas of policy and may be obliged to overreact to shocks when decisions elsewhere move in different directions. Excessively loose policies bring some negative side-effects. But the Bank of England and the European Central Bank are expected to maintain their accommodative monetary stance. The main risks for Europe will be political. The Greek crisis might be back on the agenda as questions remain over debt relief, warn Vicky Pryce and Danae Kyriakopoulou. Marcello Minenna and Edoardo Reviglio argue that Italy could prove resilient, but this would require flexibility in Europe’s goals for the structural deficit. In Japan, all policy levers are moving in the same direction but have created a huge overhang of government debt. The most promising way out is monetising it, argues Etsuro Honda. Another way to boost the effectiveness of unconventional monetary policy would be to abolish cash. Danae Kyriakopoulou reviews Kenneth Rogoff’s proposal in The Curse of Cash. We mark the passing of Hans Tietmeyer, the former Bundesbank chief, a political technocrat who negotiated and presided over the D-mark’s demise. Obiturist David Marsh knew him for 30 years. Tietmeyer was a friend of OMFIF who spoke at several meetings in Frankfurt and gave a City Lecture in London in April 2011. Europe needs people of his calibre, in 2017 and beyond.