Credit Suisse : “Getting Over Globalization” - Outlook for 2017

The Credit Suisse Research Institute today publishes its report 'Getting over Globalization', which outlines how the global economy is moving into a more multipolar form, the stability of which depends on appropriate rules and institutions being established early on. While highlighting several risks such as a rise in protectionism, currency wars and geopolitical conflicts, the report concludes that rather than halting globalization altogether, there are steps that can be taken towards a more balanced outcome.

Urs Rohner, Chairman of Credit Suisse, comments: 'Globalization has been the most powerful economic force throughout the past decades. In 2016, we observed changes to globalization as we have come to know it. Especially from the point of view of international businesses, the changing pace of global trade and political regionalization will be challenging.'

Michael O'Sullivan, Chief Investment Officer International Wealth Management at Credit Suisse and lead author of the report, explains the background to the research: 'The Credit Suisse Globalization Clock highlights faltering globalization and a world still moored to a multipolar setting. Accepting the 'road to multipolarity' is a more realistic perspective in our view, and certainly a scenario that is preferable to an 'end of globalization' outcome.'

The report 'Getting over Globalization', published by the Credit Suisse Research Institute (CSRI) is available for download at www.credit-suisse.com/researchinstitute.

The new study updates CSRI's report about the future of globalization published in late 2015, analyzing three scenarios: 'globalization continues', 'a multipolar world emerges at economic, political and social levels' and, more dramatically, 'globalization comes to an end'. (See appendix for table of scenarios.)

Using innovative analysis tools such as the Credit Suisse Globalization Clock, the report aims to measure and quantify globalization as well as multipolarity with its many facets. On the political stage, several events - the Brexit vote, the outcome of the US presidential election, the end of the Trans Pacific Partnership process - signaled that the year 2016 may be remembered as the period when globalization ran out of steam. The CSRI report expands upon several of these issues, including inequality and migration as the two prime threats to globalization that appear to be driving voter behavior in developed countries.

Ten things to watch for in 2017

If 2016 is the year that 'broke' globalization, then 2017 will see the makings of a more multipolar world, and a threat of a break-down in trade. CSRI flags ten issues to watch in this context:

• The health of trade: With the Trans Pacific Partnership (TPP) between the US, Japan and a group of Asian countries, and the Transatlantic Trade and Investment Partnership (TTIP) between the US and the EU now looking like they will not be ratified, and trade obstructionist measures growing, the pace and health of trade is perhaps the key variable to watch.
• Debt: Zero and negative rates meant that the world could ignore debt, and in many cases take on more of it. But rates are now rising, and this may put pressure on certain companies and countries. The Bank for International Settlements rightly warns that world debt levels are now higher than they were in 2007.
• Immigration: Immigration is perhaps the hottest political topic in Europe, and was a key reason why many in the UK voted for Brexit. The EU needs a plan to deal with immigration in the sense that all of its members buy into this and that it ceases to become a controversial political issue.
• When is the next recession? In the last seven years, markets have arguably priced in about four recessions. With debt levels in China very stretched and corporate margins low, and the US recovery beginning to perk up, the next natural recession cannot be too far away.
• 'Strangelove scenario' - military confrontation by accident or design: The South China Sea is frequently mentioned by commentators as a theatre for large power confrontation, but with Syria's war becoming ever more complex, there are other areas that could spark a military conflict.
• Stealth attacks or cyber war: Cyber attacks on companies are more common place now, but for obvious reasons less is heard about attacks on states by other states. It may simply be a matter of time before one of these goes badly wrong, or elicits a robust response.
• Central banking accident: A policy move could cause a central bank to lose credibility - imagine for example the Bank of Japan trying too hard to push inflation upwards, and the yen then rallying.
• People tire of consumerism: Consumerism has been a hallmark of globalization, notably now in many emerging markets. However, difficult labor market conditions in some countries (in 2015 consumers in Russia, South Africa and Turkey were pessimistic or less optimistic on their income outlook), growing wealth inequalities and indeed a shrinking middle class may dull the lure of aspirational lifestyles and the acquisition of material well-being.
• Multipolar jurisdictions harden: Some states may feel that, in the comfort of their status as a geopolitical or economic power, they can afford to ignore international law. Thus, different regions increasingly adopt their own 'way of doing things' to the detriment of trade and potentially human rights.
• Climate event: Climate change is an integral part of globalization both in terms of the effect that globalization has had on the climate and also in terms of the remedies (regulatory and technological) that have evolved to try to reverse this. 2016 was the hottest year on record and a repeat of this will strain many farms, food supply chains and could provoke humanitarian crises.

Globalization, stalling at high altitude

CSRI's measure for tracking globalization - made up of flows of trade, finance, services and people - has ebbed in the past year, and over the course of the past three years has slipped backwards to drop below the levels reached in 2012-2013, and at about the same level as crisis ridden 2009-2010.