Shades Of Grey: Macro Outlook 2017

First, Fragmentation. In the aftermath of the Second World War there was a general trend towards international frameworks followed by an exuberant rush to globalisation after the end of the Cold War.

Old geo‑political rivalries gave way and entire new markets became available for development, investment, production and consumption, resulting in bilateral and multilateral trade, political and monetary frameworks.

However, we are now witnessing a rising tide of populism. This has been simmering for a long while, before coming into the mainstream and triumphing in electoral politics.

The election of the improbable Donald Trump as America’s 45th President is perhaps the most prominent indication that populism and the creep of the political margins towards the centre is now in unabashed full gallop. 

Trump has committed himself to building a ‘wall’ along the US‑Mexico border, renegotiating NAFTA and disavowed the Trans‑Pacific Partnership (TPP). He has expressed scepticism about NATO and indicated a disinterest in the historical security guarantees given to Japan, Taiwan and South Korea.

The populist wave which has brought Trump to the Presidency has given resolve to similar movements in Western Europe.

These may lead to political success for the far right in France, the Netherlands, Germany and Italy in 2017. Democracies will once again elect its own greatest cynics.

Second, Calibration. South East Asian nations in particular, but governments more broadly, are reassessing their long held political and economic assumptions about frameworks, systems and relationships. Donald Trump is a game changer, and the ripple effects are likely to be more tsunamic than gentle.

2017 is likely to be characterised by a growing ambiguity over global leadership. Who really is leading the world? How do we think about the future of American leadership that will likely be more transactional than strategic under Trump? Where can economies – particularly those that are heavily external trade dependent ‑ find sources of demand that are relatively tariff free and accessible to fuel that future growth?

Where will smaller nations, particularly in Asia and Africa find a security partner that is reliable, predictable and capable? The answer, vigorously self‑promoted, is China. China is pointing to developments in the West– promoted as erratic, unreliable, anti‑free trade and militaristic – as a sign that countries need to find a more stable, predictable, pro‑trade and reliable ‘big brother’.

China’s characterisation of itself is best thought of in terms of its historical persona of a benevolent tribute‑demanding ‘Centre’. Those who position themselves as tribute nations will benefit while those which choose to resist or to challenge will feel the full pressure of its displeasure.

Countries do not make strategic realignments lightly. Trump’s reign is likely to be the tipping point towards a recalibration of longer term strategic geometries with the compass spinning from West to East.

With the future of the TPP in question, the Chinese can be expected to fill the vacuum with support for the Regional Comprehensive Economic Partnership or RCEP. This is an Association of Southeast Asian Nations (ASEAN) wide FTA with Australia, China, India and South Korea. 

The Chinese will also use its strengthening economic and military ties with its contiguous countries– Myanmar, Laos, Cambodia and Vietnam – to shift the reference point for ASEAN’s direction from consensus to compliance.

The Asian Infrastructure Investment Bank (AIIB), the Silk Road Fund and the One Road, One Belt strategies are practical, tangible and sizable commitments China has made to the future of greater Asia on the land side. 

Its assertion of maritime dominion in the South China Sea through its island bases and self‑declared Air Identification Zone – are more problematic.

This raises the third structural shift – Confrontation and with it the rising danger of miscalculation. With so many long‑term stable features of the geo‑political and geo‑economic frameworks now in flux, there is the danger of not only wrong calls but also rapid escalation.

The United States continued efforts to ensure freedom of navigation in the South China Sea, especially in the context of an erratic and sensitive new President, sets up a tinderbox scenario where an operational situation such as the 2001 Hainan Island incident can rapidly escalate into a wider confrontation.

The benign statements by Trump on and about President Putin have also alarmed Western Europe. The EU convened an unprecedented Foreign Minister’s meeting following the November 8th US Presidential election specifically to discuss the implications on Western Europe of a Trump presidency.

Fragmentation, Calibration and Confrontation. These shifts are likely to be enduring critical uncertainties which will force governments and transnational corporations to relook at their exposure to risks but to also search for opportunities.

These uncertainties are notable in being about fundamental and core issues long held to be stable – Global leadership, geo‑political frameworks and globalisation.

Where there had been more of a black and white picture for several decades there are now varying shades of grey.

For ASEAN nations those opportunities are to be found in finding ways to strengthen their linkages with China. The rewards they can expect, like the penalties, will be tangible and practical. 

The benefits will also be unencumbered by ‘linkages’ to thorny issues such as insistence on ensuring human rights, reducing corruption or guaranteeing political freedom as has been the case vis‑a‑vis the United States.

However, this is not to suggest that China will have it all its way. The leadership of President Xi Jinping appears to be evolving to a departure from the 10 year rule norm. He may well be positioning himself to be a perpetual leader now that he has consecrated himself as a so called ‘Core Leader’.

We can expect to see high level political chess moves in 2017 as Xi continues to consolidate his authority. The Chinese financial sector has considerable opaqueness and its relationship to the investment‑led model of growth increases its exposure to systemic risk as the economy continues to decelerate. The housing overhang in secondary cities could be a trigger for a deflation of the asset bubble that is the wider Chinese property market.

In their growing boldness in their assertion of sovereignty and what they see as their correct place at the world table, the Chinese may overreach by moving too aggressively. For many nations the dangers of American withdrawal have to be balanced against the risks of triggering an overreaction by the US to provocative Chinese moves.

These macro risks are likely to be masked by the performance of the US equity markets and to a lesser extent its real economy, which has been recovering through the 8 year period of the Obama administration. The stock markets are likely to view a Republican administration as a net positive for the economy and are pricing in expectations that Trump will deregulate aggressively and swiftly. In particular, the financial and mining sectors are poised to see market confidence in their prospects zoom if Dodd‑Frank is rescinded and the climate management related limits on mining lifted.

Expectations that Trump will launch, a deficit‑driven, expansive fiscal policy concentrated on infrastructure will boost business sentiment. The multiplier effect from infrastructure investment – if productive and not pork barrelled – could be significant.

While there is unease over the details on how Trump will ‘put America first’ by discouraging American companies from outsourcing, the potential long‑term costs to competitiveness and public revenues will be obscured by the short‑term euphoria that he is reconstituting American manufacturing, thereby ‘saving jobs’ and ‘Making America Great Again’.

The outlook for 2017 is thus one of strategic shifts that will coincide to reshape the geo‑political and economic landscapes for the longer term. These shifts, will elevate uncertainty and increase risks. 

Governments everywhere are operating with the expectation of crisis, finding themselves forced to rethink fundamental positions and long‑held relationships.

Shades of Grey shattered by the occasional burst of white lighting of crisis will continue to colour the world view for the near future. 


By Devadas Krishnadas, CEO of Future‑Moves Group