06 Jan 16 Predictions for ’16-’21
2015 was a roller coaster of a year for analysts of global economics and politics. Terrorist tragedies from the US and France to Nigeria and Iraq shocked us, Nepal suffered a devastating earthquake, and Volkswagen’s massive fraud surfaced. A million migrants flowed into Europe, and a nuclear deal was reached with Iran. The US and Cuba made progress in restoring relations, and Donald Trump grabbed global headlines. Nations reached a new set of climate accords in Paris, and the Islamic State persisted. China’s slowdown continued, it ended its one-child policy, and energy and industrial commodity prices stayed lower than expected. And of course, the Fed began its effort to normalize interest rates.
How can we possibly navigate the radical uncertainty presented by this chaotic tangle of events and trends? Some use a Magic 8 ball, while others turn to Ouija boards. I’m more conventional. Rather than try to predict what will happen in the coming year—to me, a fool’s errand, due to the short time-horizon—I try to look through the noise by analyzing structural signals and making predictions over a five-year window. Last year, I made 15 Predictions for 2015-2020. But as noted by the late Yogi Berra, “The future ain’t what it used to be!” So I’ve incorporated feedback from last year into my predictions for the next five years.
- China posts a GDP growth rate below 5% before a consumption boom re-accelerates the economy. Animal protein demand skyrockets. In the meantime, saber rattling in the South China Sea and towards Taiwan and Japan aim to distract popular attention away from domestic economic matters, but rising unrest and economic insecurity call the long-term viability of the Chinese Communist Party’s rule into question.
- In Australia, low prices for industrial commodities drive budget deficits, generating additional volatility in economic growth and the Australian dollar. Exports ultimately rebound thanks to growing Chinese demand for consumer goods and services, but housing prices in Melbourne and Sydney correct amidst slower inbound immigration.
- Low oil prices spur a transition to consumption-led growth in many emerging nations. Formerly hedged North American producers find themselves losing money and (temporarily) shut down. OPEC eventually curtails production, and tensions escalate in the Arctic over seemingly large resources. Coal markets suffer but don’t disappear. Oil ultimately rebounds as rising Middle Eastern instability combines with aggressive investment cutbacks. Fusion emerges as a viable long-term alternative energy source.
- In Canada, the combination of high household debt, high home prices, and anemic job growth due to low oil prices leads to stubbornly persistent economic stagnation. An emerging market consumer boom eventually drives Saskatchewan real estate prices as potash prices rise dramatically.
- In Africa, a growing middle class booms, boosting consumption and driving higher food prices worldwide. Low oil prices force Nigeria’s economy to diversify away from commodities and towards services. High unemployment and domestic unrest continue in South Africa, leading the once dominant ANC to lose ground, power, and legitimacy. Ethiopia’s Grand Renaissance Dam spurs a water war.
- The current technology bubble deflates even as a few champions of the sharing economy enter the Fortune 500. The biggest casualty proves to be employees of naked unicorns as venture capitalists and institutional investors utilize ratchets to limit their losses. The Internet of Things takes off, generating concerns from privacy and security experts alike. Calico becomes the world’s hottest company.
- A Robolution in Manufacturing massively increases productivity and also decreases employment. Robots prove deflationary as the labor component of goods drops and the fall in aggregate workers’ income reduces demand for the very goods the robots make. The markets for drones, driverless vehicles, and industrial robots boom.
- Saudi Arabia faces rising domestic unrest and regime-threatening instability. Regional tensions escalate, distracting the regime from addressing domestic concerns. Due to oil price pressures, the government cuts budgets for social services, giving momentum to demands for increased freedoms.
- Despite initial success, Prime Minister Modi’s “Make in India” campaign proves ill-timed, as productivity gains in automated manufacturing make the Chinese development model obsolete. Speculation arises that India may never emerge as the economic powerhouse it was once generally assumed it would become. Leaders discuss the possibility of demographic controls.
- Cyber risks continue to rise as a top concern for global boardrooms. Financial regulators begin mandating independent information audits comparable to today’s financial audits. National governments create military-like cyber teams to hunt down and bring cyber-terrorists to justice, but they are not able to avert a destabilizing attack on critical infrastructure. Ted Koppel’s Lights Out proves prophetic.
- Japan acknowledges its demographic problem and opens the doors to immigrants. It begins allowing Southeast Asian healthcare workers (nurses from the Philippines?) to care for the elderly. Economists come to understand that the older Japanese population, living on fixed incomes, actually prefers deflation.
- The United States of Europe fails to congeal as expected. The refugee crisis hastens the disintegration of the attempt at political and monetary union. Even as some countries see refugees as demographic saviors, nationalism rises in others. Separate currencies emerge.
- Central bankers struggle to unwind quantitative easing without generating massive instability. Equities suffer, credit markets tremble, and gold surges as investors lose confidence in responsible central banking. Martin Wolf’s “chronic demand deficiency syndrome” worsens leading economists to question the usefulness of productivity. The Fed finds it can’t raise rates as much as it has planned and eventually reverses course.
- In the wake of 2014’s successful containment of the Ebola virus, a new epidemic (MERS?) rears its ugly head. The global public health community again scrambles (and again succeeds) to avert a disaster that might have threatened millions of lives. Despite more health-conscious border control efforts, healthcare continues to globalize. Cuba’s economy accelerates on the back of strong medical tourism from the United States.
- The Pacific Alliance, a trading bloc centered on Colombia, Chile, Mexico, and Peru, grows its profile and emerges as Asia’s preferred economic entry point into Latin America. Mexico tries to deal with its corruption problem and makes progress towards establishing rule of law. The Colombia peace talks are ultimately successful, resulting in the end of the 50+ year civil war.
- Whoever wins the 2016 US presidential election, the American people are sorely disappointed and vote with their feet in the 2018 midterm elections, resulting in a rapid and unexpected swing of control in Congress.
As I mentioned in last year’s predictions, it’s worth recalling the prescient words of John Kenneth Galbraith: “There are two types of forecasters: those who don’t know and those who don’t know they don’t know.” I’ll let you decide which I am, but I do hope these 16 ideas provoke thought!
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