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Brexit, populism, Trump and China: I fear we’re facing a bleak midwinter

Passing through Vienna last week I managed to catch a glimpse of Hieronymus Bosch’s triptych, The Last Judgment, painted in around 1500. Its famous imagery — including assorted impalements and instruments of torture — is all rather gruesome. A modern Bosch would doubtless focus on other horrific visions: Theresa May’s Brexit negotiations; deteriorating relations between the US and China; the rise of populism and the social consequences of consistently sub-par economic growth.

Ideally I’d like to bring you tidings of comfort and joy at this time of year but I fear we’re facing a bleak midwinter. My exposure to Bosch probably hasn’t helped. Let me offer a further Brexit-related Viennese vignette.

Following the collapse of the Austro-Hungarian Empire at the end of the First World War, a range of new countries was created. As the historian Margaret MacMillan observes in her brilliant book about the 1919 Paris peace conference, Peacemakers, “in Vienna the electric lights flickered and the trams stopped running because the coal which had once come from the north was now blocked by a new border”. Those who favour a hard Brexit should take note.

It’s not just the UK facing political uncertainty as we head into 2019. Across the Channel there are big challenges ahead. Next year there will be new presidents of the European Parliament, the Council, the Commission and the European Central Bank.

They will be arriving at a difficult time. The eurozone economy is slowing down. The people are restless (notably in France). The relationship between Rome and Brussels is fraying, reflecting a budgetary debate about European rules versus sovereign democratic accountability. Countries can’t agree on immigration. And, for European car-makers, the threat of US tariffs — as part of Donald Trump’s America First policy — hangs over them.

Stephen King is HSBC’s senior economic adviser and author of Grave New World: the End of Globalisation, the Return of History (Alamy Stock Photo)
Stephen King is HSBC’s senior economic adviser and author of Grave New World: the End of Globalisation, the Return of History (Alamy Stock Photo)

Across the Atlantic, the economic news has, of late, been a bit better.

The US economy did well in the middle of 2018, thanks in part to robust consumer confidence and the effects of chunky corporate tax cuts. Yet Washington’s policymakers are now facing a dilemma.

The Federal Reserve, led by Jay Powell, wants to put its foot on the monetary brakes — partly because unemployment is now so low, threatening a build-up of inflationary pressures — but the White House wants more by way of stimulus. President Trump, not for the first time, appears to be irritated — as reported by the Washington Post: “So far, I’m not even a little bit happy with my selection of Jay. Not even a little bit. And I’m not blaming anybody, but I’m just telling you I think that the Fed is way off base with what they’re doing.”

So much for central banks standing above the political fray. Trump’s fights with the Fed, however, are not as complicated as Washington’s worries over China. In these febrile times, Republicans and Democrats don’t agree on much but, on one issue, they’re united: China is no longer regarded as a nation to be warmly embraced but as a rival to be contained. Yet the strategy adopted so far — most visibly in the form of trade tariffs — doesn’t appear to be working. American exports to China have softened much more than Chinese exports to the US.

China has also been more nimble regarding trade with “third countries”. It may be importing a lot less from the US but it’s importing a lot more from the likes of Brazil and Russia. And as China’s economy expands, so its gravitational pull increases.

"US recessions tend to occur once or twice a decade. If so, the next one may not be too far away"

This, in turn, raises a rather intriguing strategic question. If Sino-American relations deteriorate further in 2019, what should other countries do? Will they align with the US even while fearing that Washington’s increasingly isolationist and protectionist approach no longer offers them the economic and political security of old? Or should they align with China, even though its ambitions in Asia and beyond appear to be rather opaque?

Arguably, Brexit couldn’t come at a worse time: it’s going to be more than a little tricky for Whitehall to come up with trade deals with the Americans and Chinese simultaneously (if, indeed, our promised departure from the EU allows it).

Then there’s the rather tricky issue of time. The global financial crisis occurred 10 years ago. US recessions tend to occur once or twice a decade. If so, the next one may not be too far away. Admittedly, President Trump won’t want to experience a downswing before the 2020 presidential election. But economic and political cycles are never perfectly aligned.

The risks of economic disruption are rising. The combination of Fed tightening, a trade war, high levels of corporate debt and, in many cases, fragile emerging economies is not ideal for safeguarding the economic upswing. Unfortunately we have little ammunition left to fight the next downswing: debt is high, interest rates are low and, for many countries, fiscal positions are creaking.

To be fair, even if the torture of Brexit has proved to be a modern-day version of Bosch’s Last Judgment, the future doesn’t have to be a vision of hell. Perhaps Sino-American relations will thaw. Maybe productivity growth will pick up, extending the US economic upswing. Just possibly Europe’s new leaders will offer the UK a helping hand. For the time being, however, it’s difficult to be optimistic. Vienna — at one point, the centre of world politics and culture — today is merely the capital of a rather small European nation.

Some may dream of a global Britain but, in reality, we’re in danger of heading in the same direction.

  • Stephen King is HSBC’s senior economic adviser and author of Grave New World: the End of Globalisation, the Return of History (Yale University Press)