The global economy in 2018

Economistslike me are asked a set of recurring questions that might inform thechoices of firms, individuals, and institutions in areas likeinvestment, education, and jobs, as well as their policy expectations.In most cases, there is no definitive answer. But, with sufficientinformation, one can discern trends, in terms of economies, markets, andtechnology, and make reasonable guesses.In the developed world,2017 will likely be recalled as a period of stark contrast, with manyeconomies experiencing growth acceleration, alongside politicalfragmentation, polarisation, and tension, both domestically andinternationally. In the long run, it is unlikely that economicperformance will be immune to centrifugal political and social forces.Yet, so far, markets and economies have shrugged off political disorder,and the risk of a substantial short-term setback seems relativelysmall.The one exception is the United Kingdom, which now faces amessy and divisive Brexit process. Elsewhere in Europe, Germany’sseverely weakened chancellor, Angela Merkel, is struggling to forge acoalition government. None of this is good for the UK or the rest ofEurope, which desperately needs France and Germany to work together toreform the European Union.One potential shock that has received muchattention relates to monetary tightening. In view of improving economicperformance in the developed world, a gradual reversal of aggressivelyaccommodative monetary policy does not appear likely to be a major dragor shock to asset values. Perhaps the long-awaited upward convergence ofeconomic fundamentals to validate market valuations is within reach.InAsia, Chinese President Xi Jinping is in a stronger position than ever,suggesting that effective management of imbalances and moreconsumption- and innovation-driven growth can be expected. India alsoappears set to sustain its growth and reform momentum. As theseeconomies grow, so will others throughout the region and beyond.Whenit comes to technology, especially digital technology, China and theUnited States seem set to dominate for years to come, as they continueto fund basic research, reaping major benefits when innovations arecommercialised. These two countries are also home to the major platformsfor economic and social interaction, which benefit from networkeffects,1closure of informational gaps, and, perhaps most important,artificial-intelligence capabilities and applications that use andgenerate massive sets of valuable data.Such platforms are not justlucrative on their own; they also produce a host of relatedopportunities for new business models operating in and around them, in,say, advertising, logistics, and finance. Given this, economies thatlack such platforms, such as the EU, are at a disadvantage. Even LatinAmerica has a major innovative domestic e-commerce player (MercadoLibre) and a digital payments system (Mercado Pago).In mobile onlinepayments systems, China is in the lead. With much of the country’spopulation having shifted directly from cash to mobile online payments –skipping checks and credit cards – China’s payments systems are robust.Earlierlast month on Singles’ Day, an annual festival of youth-orientedconsumption that has become the single largest shopping event in theworld, China’s leading online payment platform, Alipay, processed up to256,000 payments per second, using a robust cloud computingarchitecture. There is also impressive scope for expanding financialservices – from credit assessments to asset management and insurance –on the Alipay platform, and its expansion into other Asian countries viapartnerships is well underway.In the coming years, developed anddeveloping economies will also have to work hard to shift toward moreinclusive growth patterns. Here, I anticipate that national governmentsmay take a back seat to businesses, subnational governments, labourunions, and educational and non-profit institutions in driving progress,especially in places hit by political fragmentation and a backlashagainst the political establishment.Such fragmentation is likely tointensify. Automation is set to sustain, and even accelerate, change onthe demand side of labour markets, in areas ranging from manufacturingand logistics to medicine and law, while supply-side responses will bemuch slower. As a result, even if workers gain stronger support duringstructural transitions (in the form of income support and retrainingoptions), labour-market mismatches are likely to grow, sharpeninginequality and contributing to further political and socialpolarisation.Nonetheless, there are reasons to be cautiouslyoptimistic. For starters, there remains a broad consensus across thedeveloped and emerging economies on the desirability of maintaining arelatively open global economy.The notable exception is the US,though it is unclear at this point whether President Donald Trump’sadministration actually intends to retreat from internationalco-operation, or is merely positioning itself to renegotiate terms thatare more favourable to the US. What does seem clear, at least for now,is that the US cannot be counted on to serve as a principal sponsor andarchitect of the evolving rules-based global system for fairly managinginterdependence.The situation is similar with regard to mitigatingclimate change. The US is now the only country that is not committed tothe Paris climate agreement, which has held despite the Trumpadministration’s withdrawal. Even within the US, cities, states, andbusinesses, as well as a host of civil-society organisations, havesignalled a credible commitment to fulfilling America’s climateobligations, with or without the federal government.Still, the worldhas a long way to go, as its dependence on coal remains high. TheFinancial Times reports that peak demand for coal in India will come inabout ten years, with modest growth between now and then. While there isupside potential in this scenario, depending on more rapid costreductions in green energy, the world is still years away from negativegrowth in carbon dioxide emissions.All of this suggests that theglobal economy will confront serious challenges in the months and yearsahead. And looming in the background is a mountain of debt that makesmarkets nervous and increases the system’s vulnerability todestabilising shocks. Yet the baseline scenario in the short run seemsto be one of continuity. Economic power and influence will continue toshift from west to east, without any sudden change in the pattern ofjob, income, political, and social polarisation, primarily in thedeveloped countries, and with no obvious convulsions on the horizon. –Project Syndicate* Michael Spence, a Nobel laureate in economics,is professor of Economics at New York University’s Stern School ofBusiness and Senior Fellow at the Hoover Institution.