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Crystal Ball

With plenty of risks ahead including geopolitical and economic instability, here are the five main challenges facing the world economy in the upcoming Year of the Rooster.

This year has certainly brought enormous change in the political realm, with major shifts and realignments underway across Europe and the United states. So far world financial markets seem to be holding up well, without much evidence that increased political risk is spilling over into the economic realm.

Economists across the world fear that the global economy will not fare a lot better than the sluggish growth seen in 2016. The global economy will expand 3.1 percent this year and 3.4 percent next year, according to the latest World Economic Outlook by the International Monetary Fund, released in October. The fund lowered its 2017 forecast to 3.4 percent from 3.5 percent in July.

With plenty of risks ahead including geopolitical and economic instability, here are the five main challenges facing the world economy in the upcoming Year of the Rooster.

1. Geopolitical Disruption

A few years ago (or maybe just a month or two back?) globalism seemed like an inevitability. It was a fact of life that the world would become more connected, not less. That trade would increase, not stall out. And that individual people would find themselves with more in common with people and cultures across the planet, not less. That outlook, at least as far as 2017 goes, isn’t so clear anymore.

U.S. President-elect Donald Trump’s future policy stance poses “the single largest risk to the global economy,” according to a client survey by forecasting firm Oxford Economics Ltd. More than half of respondents said that the probability of a sharp slowdown has increased over the past three months, according to the firm’s Nov. 14-21 survey on global risk perceptions conducted among about 180 clients and contacts.

Even the International Monetary Fund has warned that rising populism and protectionism have correlated with stagnating economic growth. In its latest “World Economic Outlook,” the IMF’s chief economist Maurice Obstfeld warned that “turning back the clock on trade can only deepen and prolong the world economy’s current doldrums.”

At the same time boundaries are being redrawn for nations and states defined by population and business. Global boundaries are shifting as mega-cities and mega-regions define our territories rather than nation states.

Globalism isn’t going away. People still want the conveniences and entertainment that only come by way of modern economies. But with politics at the forefront, a new conversation about what it means to be American and what it means to be a global citizen has begun. That means brands need to be clear on their values – and be unafraid of the consequences of them. It also means that messaging will most likely change.

2. Europe

With national elections set for France, Germany and the Netherlands in 2017, each of which feature a far right candidate, there is potential for economically damaging protectionist policies in the Eurozone.

However, these merely form the backdrop for the most significant geopolitical event to occur in 2017, Britain’s triggering of Article 50 and the commencement of its slow exit from the European Union.

While Britain’s influence in the global economy has diminished in recent decades, the impact of the June Brexit vote was felt in markets and currencies across the globe. The fact that markets are still rattled was shown recently by the British pound’s fall to 186-year-lows in the wake of British Prime Minister Theresa May’s announcement that Brexit would commence by next March.

The longer the saga continues, the longer the associated uncertainty will be priced into equities and currencies, dampening corporate investment and damaging the European economy as a whole.

3. Monetary policy reaches its limits

A phenomenon arguably already unfolding as central banks reach the limits of the expansionary monetary policy tools at their disposal, 2017 may be the year some have to face the music.

Eight years of quantitative easing (QE) since the global financial crisis have increased the balance sheets of the world’s four largest central banks from $6 trillion to $18 trillion, most of which consists of their own government’s bonds.

While QE has succeeded in maintaining short-term liquidity in markets, its diminishing returns mean the end is nigh, with the Federal Reserve Bank in the U.S. already tighening and speculation starting to mount that the European Central Bank (ECB) and Bank of England (BOE) may be prepared to to follow suit..

The mere hint of tapering led to a “taper tantrum” in European markets earlier this month, similar to that which occurred in the United States in 2013, and should the ECB or BOE pull the plug on QE in 2017, markets will suffer. Japan’s central bank’s move into negative rates territory has also sparked debate over the future of its QE policies and at what point it may be forced to pull back on government bond buying.

4. Tighter fiscal policy weighs

The IMF’s October report predicted fiscal policies in developed economies would tighten even further in 2017, despite calls for increased government spending to drive growth.

recent survey of money managers by the Bank of America Merrill Lynch found that 48 percent believe that global fiscal policy remains too tight, a sentiment echoed by many other economic commentators worried over the increasing ineffectiveness of monetary policy.

Yet while the West tightens, it will hope China continues its fiscal policy splurge, fueled by a desire to keep economic growth at politically acceptable levels ahead of the 19th National Congress next year.

5. Commodities recovery reverses

Having already annihilated economic growth in Brazil, Russia, Nigeria, and other previously considered rising star economies in 2016, commodity prices will only see a modest recovery in 2017, according to the IMF’s October report.

Softer commodity prices have disproportionately hurt emerging economies, which in recent years have made a disproportionate contribution to global economic growth. While emerging Asia and particularly India have appeared largely resilient, the IMF fears that sub-Saharan Africa, South America, the CIS region and the Middle East will not fare so well. On the upside, the recently announced deal between OPEC and non-OPEC producers to cut production by 1.2 million barrels per day effective as of January 2017, has helped oil prices sustain a price rally in recent weeks, with some analysts predicting further price gains as the supply overhang begins to abate.

Nonetheless, the weakness in the broader commodity markets, which led to contractions in some of these major emerging economies in 2016, together with the unrelentingly sluggish growth being combatted by most developed economies, suggests that 2017 will be yet another challenging year for the world economy. World leaders will face a tough time keeping the global recovery on track next year, even while wars, terrorism and other threats add to the challenges.

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