May 2017

• The synchronized economic recovery continues to make headway, but the US and China, the engines that propel the global economy, are set to decelerate soon. We give below the reasons why Trump’s 3% GDP target is unrealistic and why US growth is likely to disappoint. As for China, monetary tightening to contain financial excess is inevitable, lest a crisis comes first. All hopes for brisker, sustainable global growth are pinned on innovation rescuing the world from stagnation. It might but no time soon. The key reason is that today’s innovations improve how we consume existing goods and services rather than producing new ones or reshaping the way we make them. The impact on productivity is therefore limited.

• Macron’s victory comes as a huge relief to the Eurozone, but it could be no more than a respite. If the French president can’t deliver tangible improvement in people’s living standards, the populists will win the next election: the forces which propelled them in the first place (rising inequalities and deep anxiety about the future) aren’t about to go away. Beyond favouring structural reforms (that only go so far in terms of growth) and hoping for a productivity boost triggered by AI, what else can be done? Although costly in terms of economic growth, inclusive welfare policies and a strong social safety net will remain the best defence against rising populism.

• Britain’s decision to leave the EU and Trump’s tirades against the “old” continent will serve to make the EU stronger, not weaker. Macron’s strong espousal of the EU plus Merkel’s exhortation that: “We Europeans must take our destiny into our own hands” suggest that: (1) The markets’ (fading) conviction that the Eurozone or the EU will disintegrate will be proven wrong in the foreseeable future; (2) There’ll be a push towards greater integration, whatever form it may take. In the end, however, EU success won’t be possible without Germany making a gesture in the form of an increase in domestic wages. . .

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