Hello readers, Happy New Year!! And a warm welcome back to rsira-economics.com.
2016 has been, an ‘eventful’ year with a number of shocks and surprises, for better or for worse. Although I suppose that’s what economics is fundamentally about – how we respond to an ever-changing economy and make decisions to maximize utility. From President-elect Trump in the USA and Brexit in the UK, many are hoping that 2017 will be a more ‘normal’ year.
In today’s post, I will be doing something slightly different. I will be predicting what I think and what other economists out there think is likely to happen in 2017. Before you say it, no I’m not a mind reader, or fortuneteller or something completely irrational like that. Economists like to use something quite sophisticated, it’s what they call probability distribution, which is in a sense where they make educated guesses based on data to analyse the economy. They also look at what could happen and base many aspects on speculation. In fact, the whole brexit process has purely been speculation. Since the referendum result on June 23rd, nothing has actually changed in terms of deals or agreements, yet many businesses were reconsidering investment into the UK and more noticeably the pound hit a 31 year low.
I hope to keep this post short and to the point, and will stick to just 4 predictions/hopes for the year 2017. If you have the time please give this post a quick read; it will be shorter than usual and might give you some useful insights into what to expect this year and to prepare yourself for what might be about to come your way. As always please post any ideas that you wish to share below or email them to me at email@example.com
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2017 in a nutshell:
- ‘To Brexit or not to Brexit that is the question’?
Unfortunately, it seems there is only one answer to this question. Echoing Theresa May’s words, ‘Brexit means Brexit’ and now it is pretty much impossible for the decision to leave the European union to be reversed. The two questions looming over our heads for 2017 is what will happen when Britain leaves the European union? And will Britain still have access to the single market? The outcome of this, especially if we opt for a ‘hard’ Brexit (no access to the EU single market), will greatly impact companies and business as well as the everyday consumer as discussed in last year’s post.
For the next few months, you are likely to hear many complex words in the economics jargon all over the news, from inflation to interest rates and ‘animal spirits’ of what could and could not happen. All you need to know is that if Mrs. May opts for a ‘hard’ Brexit it is likely to cause the most uncertainty, and this is favoured by ‘brexiteers’ because it prevents free movement of people. A ‘soft’ Brexit will closely resemble the current set up and will have less of an impact on firms but will still allow free movement of people, something which many who voted Brexit are against and was the ultimate reason why they voted Brexit.
However, it is still not certain as to what Theresa May has got in mind for the future of the UK. A recent article from the Guardian suggests that we could be heading towards a hard Brexit and that the prime minister is said to be preparing to make clear that she is willing to sacrifice the UK’s membership of the single market and customs union in order to bring an end to freedom of movement. According to an article in the economist this week, they said, “Theresa May does not really know what she wants”. Since Brexit was such a shock, ministers did not really plan for how we would actually ‘Brexit’.
What I think will happen: I believe like the Guardian that Britain will opt for a hard Brexit. Mrs. May has made it clear from the start that Brexit means Brexit and that she would like to fulfill the request of the majority of Brexit voters of controlling immigration. Following this it is unlikely that the EU will allow the UK access to the single market and so confidence in the economy will go down, house prices could fall, inflation could rise due to a further drop in the value of sterling reducing the real purchasing power of money and making it harder for people to afford everyday items. Unemployment which is at an all-time low in the UK could rise as firms lose confidence and don’t hire more workers. In the long run, things may look better as Britain makes new deals with countries all over the world and comes to some arrangement with the EU. It is almost certain that the UK will continue trading with the EU as the UK needs the EU and the EU needs the UK. Everything is still very uncertain and risky, but it is clear that a hard Brexit will cause some sort of economic turmoil before we see any benefits.
2. Oil prices to go up or down?
Last year I discussed the irony of how oil is a finite source and that the worldwide supply is being depleted, yet the price can actually go down. Oil prices are always of concern to consumers as they can cause inflation and make everything more expensive. This is particularly damaging if incomes are not rising at the same level. My prediction for oil prices is that they will rise from their low levels of about $53 dollars a barrel, due to OPEC’s intervention and cut in oil supply, although I don’t think they will rise above $100 a barrel as these prices encourage further investment into oil production/exploration which will then cause excess supply forcing prices to drop dramatically. In addition, an article by the BBC stated that the United Arab Emirates has said that it intends to invest $163bn (£134bn) in projects to generate half of the nation’s power needs from renewables by 2050 in order to balance economic needs against environment goals. The UAE has a powerful influence on oil prices and heavily relies on it to fuel its growth. If they are starting to consider alternatives now and diversify their economy by promoting tourism instead, it is likely that more countries will start making the switch to alternatives and overall there will be less demand for oil in the world.
3. America and a new man in the white house
Will trump really ban Muslims and build a wall?
Donald Trump made some powerful statements that he is going to call for a ‘complete ban on Muslims entering the US’, build a wall across the border with Mexico and that climate change is fake. Is there any truth in what he is saying?
In my 2016 blog on Trump just after the announcement was made, I explained how the ‘banning Muslims’ statement had been taken off Trump’s website and that this was extremely unlikely to ever happen. However in a recent article by the independent, it said that following the Isis-related attack at a Christmas market in Berlin, Mr. Trump renewed his calls to carry out sweeping discriminatory acts against Muslims from overseas and the American Muslim population of around 3.3 million people. Does this mean that even the Mayor of London can’t visit the States? If this is the case, what has the world come to? Trump is arguably the most powerful man in the world, but the question is why are millions of people supporting him and his absurd views. How can we ban people from a country based on their beliefs. What’s next, skin colour, hair colour…?!
Of course, if he does go ahead and actually do it, the US will suffer economically as its Muslim community migrates, tourism falls and its popularity with other countries falls.
As to whether he will build a wall, although it’s another outrageous idea, I believe that this is more likely as Trump has shown no signs of backing down from this one. As to whether Mexico will pay for this, I don’t think this is likely to happen. Firstly the cost of the wall could be upwards of $25 billion, something which Mexico simply cannot afford. Secondly, how can you force a country to pay for something they don’t even want. It simply doesn’t work.
4. Will China the Economic Powerhouse of the world continue to perform? Or could this lead
China currently represents about 40% of global economic growth, so if it heads into a recession, its effects will be felt by all, just like the 2007/8 financial crisis in the US and U.K. (caused by the subprime mortgages). Its effects rippled outwards and put the world in the greatest economic depression since the 1930s. China has a huge debt bubble and concerns of whether it can sustain its growth could lead to a bust.
I think it is unlikely that China could send the world into a depression similar to the one in 2008/9 but uncertainties with its housing market and whether or not it can sustain growth could impact the global market to some extent. Furthermore, China is the country Trump is mostly willing to pick a fight with, in 2017. Any significant trade disputes with the Chinese will be met with China lowering the value of its currency.
The only thing we can really do is to wait and see what happens. I’ve discussed what I think is likely to happen based on my assumptions but others may believe something else based on their assumptions.
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