Growth during 2017. The IMF has released the second of its biannual World Economic Outlooks for 2017, and it paints a relatively rosy outlook. For the first time in several years, it has raised forecasts of growth rather than lowering them. For example, it has upped its projected growth for the world economy for 2017 to 3.6% from 3.4% and for 2018 to 3.7% from 3.6%. Drivers for this are upward revisions to the OECD, Asian and Eastern European countries with downward revisions confined to commodity producing regions such as Africa and the Middle East. This optimism is in marked contrast to the pessimism predominant only 18 months ago as a result of a mild slowdown and a fall in commodity prices. This affected business optimism and led to a fall in investment, the main driver of the slowdown. This slowdown reversed itself in the spring of 2016 and has gathered strength ever since. As always, sentiment takes time to catch up on what is happening on the ground and it is only this year that analysts have appreciated just how strong the recovery is most notably in low growth areas like Europe and Japan. Much is made of the so-called anaemic growth since the GFC in 2008. This reflects two things. The first is the long term structural slowdown in OECD growth that has been going on since the 1970s and is in part due to a productivity slowdown and in part due to demography. The second is that some of the slowdown is due to weak government consumption, as governments have tightened fiscal policy. Even so, growth in the OECD has hardly been disastrous in the last few years, averaging just under 2%. What does this mean for monetary policy? Inflation remains low in most of the world and below most central banks’ targets. Bond yields also remain low and show no sign of rising dramatically. The Federal Reserve certainly wants to normalise policy but admits to the inflation conundrum. The ECB and BoJ are both still indulging in QE but will face the dilemma soon of withdrawing that easing. One answer for the inflation conundrum is that the world is still operating under conditions of excess capacity though whether that negative output gap is narrowing, only time and the inflation data will tell. If the world still faces such an output gap and it is not narrowing, then it is wrong to raise interest rates. If the output gap is narrowing, then the Fed’s policy is right as it slowly tilts against the wind with a very gradual tightening in policy. What it must avoid doing, however, is raising short-term rates higher than long-term rates, so creating a negative sloping yield curve. This would tip the world into a totally unnecessary recession, given that inflation remains low. A recession will only be necessary when the world is experiencing a rapid rise in inflation and bond yields, and we are not there at the moment.

UK Election 2017 – post mortem Along with many others, last week’s UK election has proved somewhat humbling, not only because I completely underestimated Jeremy Corbyn but I also got the mood of the country very wrong. That said, I found election night riveting and the result encouraging and a victory for democracy. Last Thursday, I wrote that the Conservatives would win handsomely based on ‘a safe pair of hands’ for Brexit negotiations, that Corbyn would not be taken seriously by the electorate and that the voting would be dominated by the ‘golden oldie’ brigade. None of these proved to be true. The Conservatives ran a poor campaign, perhaps as a result of over-confidence and their policies just did not resonate with the electorate and were badly and confusedly presented. The electorate blamed Tory austerity for the problems of the NHS with some justification. Labour on the other hand ran a very good campaign partly because that is something Corbyn is extremely good at, another factor the Conservatives underestimated. And finally it was good to see the younger generation coming out to vote in far greater numbers than in the past. It is hard to judge what factor Brexit played in the election. The collapse of UKIP was significant but it is open to debate who it benefited. The election result has seriously weakened the UK’s negotiating position with the EU as it has the position of the ‘hard Brexiteers’ within the Tory party. The position of the Conservatives would have been even worse had it not been for the gains they made in Scotland and the Scottish Tories are very much on the soft side of ‘Brexit’. The DUP, the new putative allies of the Conservatives in Westminster, also have their demands vis-à-vis trade with the Republic. Ultimately it is probable that the electorate are somewhat bored with Brexit and are more concerned over other issues such as the NHS and social spending. Just get a deal done that is not too disruptive to trade but reduces the number of immigrants seems to be the message. The other political trend that got a bloody nose last week was populism. It is likely that the travails of Donald Trump have given populism a deserved bad name and got a bit of protest vote out. Jeremy Corbyn is the very antithesis of Trump unlike Theresa May. It is noticeable how much more self-confident the EU is helped by the success of Macron in France and stability of Merkel compared to the antics of Trump. So British politics is now extremely fluid and unpredictable which is good news for those of us who find such things fascinating even if we are no good at predictions. Who knows how long May will last or the Conservative government or what the final outcome of Brexit will be? Everything is up for grabs. And we not even mentioned the SNP!

UK Election 2017 One of the intriguing issues about British general elections is how everyone hangs on the latest opinion poll, and 2017 has been no different from previous elections. The start of the election campaign saw the Tories way out in the lead and looking to romp home with a majority well in excess of 100 and the Labour party down to 150/160 seats (out of 650). Since then the Tories have stumbled over a number of issues most notably the ‘dementia’ tax and Jeremy Corbyn has performed much better than expected. The result is that one or two recent opinion polls have suggested that the UK might end up with a hung parliament. Such an outcome is of course possible but highly unlikely. If, as I expect, the Tories win with a majority of over 70 and possibly 100, questions will be asked as to why, yet again, the opinion polls got it so wrong. But this is the wrong question; a more pertinent one is why we believed the opinion polls in the first place. One reason is that too many people just don’t understand sampling errors, and most opinion polls fall within that margin of error, i.e. they don’t get it wrong. Another is that the answer given to opinion pollsters is different from how people actually vote. Pollsters being intelligent people do try to correct for that bias but it is not easy. And the third reason is that people need a story to make the election more interesting and what better than a rogue opinion poll. As regards today’s election, the reason the Tories should win with a handsome majority is that once inside the polling booth, voters will go for a ‘safe pair of hands’. Corbyn may have the ability to connect with voters, and he is a moral, decent person but few people will trust him to run the country which is what matters. He has also equivocated on Brexit and again voters want a PM who will make the best of what is likely to be a tortuous, fraught negotiation with the EU. As a committed ‘Remainer’ I find the whole thing depressing. And for those who are interested in the intricacies of polling, I would recommend Nate Silver and https://fivethirtyeight.com/features/the-three-scenarios-for-the-u-k-election/

Populists It is fashionable to denigrate those who purport to despise Donald Trump and the various other ‘populists’ as being out of touch. Anyone celebrating Geert Wilders relatively poor showing in the Dutch election is warned that nationalism is still on the rise. It is indeed a mistake to write off Trump, Wilders, Le Pen and others – they are astute operators playing on legitimate fears. It is also a mistake to write them off because their policies are bordering on the idiotic – we are all capable of believing something because we want to despite evidence to the contrary. Yes, it is wrong to belittle Trump et al but it is not wrong to believe passionately that these people will in the long run make us all worse off. Take Donald Trump. He is no idiot but he has a dangerous narrow view of the world and despises diplomacy. His refusal to play by the rules could be refreshing but the most likely consequence seems to be bitter infighting in the White House. Other leaders will exploit this and use it to their advantage and the US’s disadvantage. His insistence on alienating America’s friends for no good reason has no logic apart from keeping his core support happy. It is ironic that the leader of the liberal world is now Germany. In some ways, Angela Merkel has shown courage. She said that Germany needs immigrants to offset its demographic problems, something that is very true though she got little credit for doing so. The German economy continues to perform well with a productivity record that is as good as the US’s. But the Germans have also made mistakes. They have less than generous in ensuring the euro’s survival. Their insistence on austerity has played into the hands of populists around Europe who blame immigrants for poor economic performance. The one thing that is working in liberals’ favour is the mess the British have got themselves into. The victory of the Brexiteers continues to be Pyrrhic with their visions of a post EU free trade paradise looking completely delusional. The cold reality is that the foreign exchange markets continue to take a very dim view of Brexit, a process that is proving to be enormously complicated and likely to cost tens of billions. As the name suggests, populism can be popular but that does not make it right. Despising populists is of no use to anyone but demonstrating the benefits of internationalism and liberalism is. Economic integration works and immigrants generally add value to an economy. The fallacies of mercantilism were demonstrated a long time ago. Liberals may not have all the answers and being human they make mistakes. But they generally go in the right direction which is more than can be said for D Trump and his acolytes.

Russia. Vladimir Putin has done well to keep Russia in the headlines as befitting the historical stature of the old USSR rather than the current weight of its GDP in the world economy. Using PPP exchange rates, Russia is the 5th largest economy on a par with Germany and behind the US, China, India and Japan. Using market exchange rates it is only 10th behind France, Italy, the UK and Brazil. In population terms, it is 9th behind a number of populous emerging economies such as Indonesia, Pakistan, Nigeria and Bangladesh. And its relative position will continue to decline as its population falls and its economy underperforms. Yet one would not think this from the headlines. Indeed, the Kremlin seems to have been a major player in determining the outcome of the US presidential election. It has outmanoeuvred the US in Syria. Its intelligence network seems to be everywhere and many of the old Soviet republics struggle to escape its clutches. But and this is a big but, its weaknesses are all too apparent. First, its population is declining and it will soon be overtaken by Mexico. Secondly, the Russian economy is too dependent on oil. This is not just in terms of selling barrels of oil but also the dependence of the financial sector on oil. Thirdly, capital continues to flow out of the country at a remarkable rate. It is this failure to diversify away from oil over the last 25 years that is Russia’s greatest weakness. This is in part reflects its comparative advantage in oil (Saudi Arabia has a similar problem) but it also reflects a strong authoritarian streak within the body politic. One sector like oil is easier to control than a multitude of several diverse sectors. That a small number of extremely wealthy oligarchs emerged after the privatisation process also did not help. Battles emerged between the Kremlin and any oligarch that showed an independent streak which the Kremlin normally won. This increased the incentive to export capital rather than reinvesting in the domestic economy. Whilst this dependence on oil may suit the Kremlin from a political point of view, it is not a successful long term strategy for the economy. This was made blatantly obvious by the fall in the oil price a year ago. Suddenly the easy money wasn’t there, budgets dried up and wages frequently couldn’t be paid. Domestic discontent is rising as are bank failures. Foreign military excursions are not as affordable as they once were. Russia still has the ability to cause trouble. Putin is a skilled operator but there are limits. A love-in with Trump may be entertaining, but inevitably the wiser heads in Washington still see Russia as a strategic threat. If Putin wants sanctions removed, he will have to pay a price. The stalemate in the eastern Ukraine shows trouble making can only be taken so far. If Europe pays a bit more for its defence, then suddenly the concerns over the US’s commitment to NATO are no longer there. The addition of Syria as a client state is not that great an achievement. So ultimately the message is not to be deceived by the headlines. Russia has played a weak hand well but now the cards are on the table, it is obvious to all that it is a weak hand.

Donald Trump What should we make of Donald J Trump? He claims he is smart and in one strong sense he is. He won the election. Yes, he lost the popular vote but that is not the point; he won the electoral college vote which is what matters. We should not forget that the Republicans also strengthened their grip on both Houses in Washington. And here we have something interesting. Trump articulates rage; the antagonism the forgotten middle class feel against the Washington elite. And yet it is an elite who gain most from Trump’s election. This is not the elite of the bureaucracy and the universities, but the big business elite, those with the huge pay packets. They are salivating at the prospect of big cuts in income and corporation tax and the roll-back of regulation. Some of these changes will be sensible; the treatment of taxation of overseas profits by US firms just does not make sense. And it is not clear that Dodds-Frank Act is the best way to regulate the finance sector. There is also a palpable revival of animal spirits in the US as evidenced by the strength of Wall St since the election. That is the good news and don’t knock it. The global economy has been lacking in animal spirits ever since 2008 and such spirits are essential for a strong economy which can deliver benefits to everyone. Unfortunately there is a very large ‘but’. Firstly it is not clear how a rampant Republican party will benefit the forgotten middle class with tax cuts for the rich and the repeal of Obamacare. Yes, some jobs will be created in the Mid-West as corporations are brow beaten into opening plants there rather than in Mexico. But increased costs through tariffs will soon eat into living standards. And as interest rates rise relative to the rest of the world, a rising dollar will reduce the attractiveness of the US as a manufacturing base. Secondly however smart Trump was in winning the election, there is no evidence that he is a particularly good businessman. He is nowhere in the same league as Warren Buffett, Bill Gates or the late Steve Jobs. It may be smart to use the bankruptcy laws to your advantage but it suggests that Trump has been bankrupt rather too often for comfort. Thirdly there is Trump’s approach to trade and diplomacy. He is an advocate of doing deals for the benefit of Americans, rather than the benefit of the US’s trading partners. This is a narrow and incorrect view of trade. Trade benefits both the US and Mexico or China or elsewhere; it is not a zero sum game. There is no evidence that the US has lost out in its trading arrangements with other countries. It is something similar with diplomacy; what strategic benefit does the US gain from alienating its friends. Trump’s attitude to Mexico is inexplicable. His attitude to Europe is also strange; whatever the faults of the EU and NATO, keeping Europe onside is ultimately more important that coddling up to Russia Finally, there is the rise of ‘alternative facts’. It is this that may well define Trump as a president. Truth has morphed into truthiness. Truth is what you want it to be, not what it is. Trump wants to believe that he attracted the largest inauguration crowd ever because that appeals to his narcissism and so makes it ‘true’. So, is Donald Trump smart? Yes, I would concede that he is but it is the smartness of the demagogue and a liar. It is not what you want from an American president.