Large countries have been toughening restrictions on foreign acquisitions and flow of technologies. The US Committee on Foreign Investments objected to a record number of requests by overseas investors in 2017. The EU is planning to implement a screening framework for cross-border acquisitions. US tax reforms may potentially have adverse consequences for international trade and investment flows. The finance ministers of France, Germany, Italy, Spain and the UK have written to the US, warning that some provisions of the US Tax Cuts and Jobs Act may contravene international trade agreements and tax treaties. For example, a 20% excise tax could be imposed on payments an American company makes for buying goods or services from its foreign subsidiary. We will do well not to get complacent about the return of “mama bear” because the underlying causes for populist anger and support for protectionism are deeply rooted. Income inequality in many advanced economies remains wide. According to research by McKinsey, two-thirds of households in the US and Western Europe have experienced stagnating or falling real income between 2005 and 2014. Trade and immigration are the obvious scapegoats for voters frustrated by the stagnation in living standards. The risk remains that some countries may erect trade and investment barriers and others may do so in retaliation. A protectionist spiral will almost certainly derail the growth momentum, not just for 2018 but beyond. “Baby Bear” - Financial Instability And finally, the “baby bear” of financial instability.
The government is expected to rein in local government spending, tighten curbs on residential property purchases, and seek to reduce excess industrial capacity. But the slowdown is likely to be measured and the risk of a “hard landing” has narrowed. A Goldilocks economy but three grumpy bears may not be far away A striking feature of the global economy is how subdued inflation has been despite broad-based economic expansion and highly accommodative monetary policies. This benign inflation environment provides the runway for very gradual monetary policy tightening and credit conditions remaining accommodative for longer. Many analysts have characterised the current configuration of healthy growth, low inflation, and easy financial conditions as a Goldilocks scenario: a global economy that is chugging along, not too hot, not too cold. And financial markets see this happy scenario as self-reinforcing, sustained, and accommodated over multiple years. This has supported high equity valuations, low bond yields and narrow credit spreads. But as David Skilling reminded us recently, the Goldilocks story is not complete without the three bears. The absence of the bears does not mean they do not exist. They could return any time. There are unseen risks out there – that we ignore at our peril. Each of us will have our own list of three bears. Let me share with you what I see as the three bears that might return to spoil Goldilocks’ happy stupor. My “papa bear” is inflation; “mama bear” protectionism; and “baby bear” financial instability.