Ruchir Sharma On 10 Big 2017 Trends Including The Death Of Outsourcing

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By many accounts, the election of a former reality TV star as leader of the free world has made its future more unreal, and more difficult to forecast. But Donald Trump is just a striking reminder of a basic forecasting rule: expect the unexpected. Here are 10 trends to watch in 2017, with an eye to the unexpected.

1. Though in intellectual circles the results of the US election were greeted as a grim shock, what followed was just as surprising: the Trump Bump. The US stock market shot up, and now that rally is morphing into a rally in US business and consumer confidence, which have recovered to levels near or beyond highs last seen before 2008. One factor driving up confidence is faith that Trump's team can boost US economic growth much the way Ronald Reagan did, by cutting red tape and especially taxes. The tax plan, in particular, is likely to be a bump heard around the world.

Trump's team has proposed to cut the US corporate tax rate from one of the highest in the developed world (35 percent) to one of the lowest (15 percent). Though many of Trump's proposals are widely contested and may not fructify, this one has broad support, and could pass into law quickly. If it does, the likely result is a race to the bottom, as nations from India to Germany face pressure to match this new competitive challenge from the world's largest economy. India has a corporate tax rate of over 30 percent, one of the highest in the emerging world, and will face particularly sharp pressure to lower it quickly.

2. This tax competition threatens to break out at a time when Globalization is in Retreat, making it more difficult for any economy to grow rapidly. The flows of people, money and trade that defined the era of rapid globalization have all stalled or reversed since the crisis of 2008. After climbing steadily for decades, trade peaked at 60 percent of global GDP in 2008, and has since slipped back to just 47 percent. Flows of capital peaked in 2008 at 16 percent of global GDP, and have since fallen back to 2 percent.

With globalization giving way to deglobalization, the model of development based on exporting your way to prosperity is dead. In the past, rapid per capita GDP growth was almost always propelled by rapid export growth. Now, the economic advantage is shifting from traditional export powers like South Korea to countries with relatively low exports as share of GDP and large domestic consumer markets, like Peru and Indonesia. Fortunately for India, it is also among that latter group. However, in an era marked by weaker flows of people, money and trade, India's outsourcing industries are no longer likely to be a major source of growth.

3. Like every country, India needs to adopt The New Math of Economic Success. In addition to weaker flows of goods, money and people, the post-war baby boom that drove global growth before 2008 is now over. Population growth is slowing in most countries, and this has a direct impact on economic growth. It helps to explain why the number of economies growing faster than 7 percent a year fell from more than 50 before 2007 to just six in 2016. These six were mostly small, poor countries like Ivory Coast and Tanzania. India was the only large one if you believe the official GDP data. Regardless, India needs to understand that with global growth slowing sharply, it is almost impossible to grow as fast as 8 or 9 percent in this low growth post-crisis world.

4. Since the global financial crisis, the aftershocks have helped generate a Revolt Against Incumbents. In the 50 largest democracies, the incumbent won only 40 percent of national elections last year, down from 90 percent in 2009. One of the more alarming aspects of this revolt is the way leaders have responded in an effort to protect themselves. Leaders like Vladimir Putin in Russia and Recep Tayyip Erdogan in Turkey have cultivated their base by growing more aggressively nationalistic. Others have started trying radical experiments to counter sub-par economic performance: arguably, India's demonetization drive was one such scheme. It may be the harbinger of more such experiments to come.

5. The new populist strongmen are capitalizing on a Declining Faith in Democracy all over the world. The World Value Survey shows that since 1995, across a wide swathe of nations, the share of respondents who say they would prefer more authoritarian government has risen compared to the share who prefer more democracy. The shift in favor of strongman rule ranged from 2 percent in Britain to 5 percent in India, 8 percent in the United States and 25 percent in Russia. One driver of the democratic recession may be that younger generations have less experience with communist or other forms of autocratic government: the same survey shows that younger people are much more likely than their elders to favor a strong ruler over elections. This trend bodes ill for the economic future: my research shows that democratic regimes are more closely associated with strong, steady growth than autocratic regimes are.

6. One side effect of growing nationalism is more Global Tension and the spread of regional arms races. As America pulled out of the Middle East in recent years, and rival powers like China, Russia, and Iran showed a greater willingness to project military power, tensions rose. It is no accident that over the last decade, the sharpest increases in military spending came in regions or countries bordering these three increasingly nationalistic and assertive powers: spending was up 75 percent in East Asia, 95 percent in East Europe, and 100 percent in Saudi Arabia. If Trump's promise to put America first means that the sole superpower turns further inward, its allies may well seek to arm and defend themselves even more aggressively.

7. Trumps arrival in office may also coincide with a Cooldown in US Tech. Every decade sees investors chasing some hot trend, and so far this decade, Silicon Valley has been back in vogue, led by the FANG stocks (Facebook, Amazon, Netflix, Google). But now there are signs of a turn. The number of new US unicorns-start-ups that grew past $1 billion in value-slowed sharply over the course of the last year. And the buzz in tech is about mark downs, down rounds and shut downs: companies are facing mark downs in their estimated value, difficulty raising money in later rounds of financing, and in some cases shutting down completely. India has weathered this pressure relatively well-the number of Indian unicorns rose last year-but it won't remain immune forever.

8. The place to look for good news in 2017 is where it is least expected: Europe, Where Hope Flags Eternal. Analysts have become so accustomed to serial crises on the continent they always expect another one, but Europe has already suffered two recessions within eight years-a rare double whammy that makes another downturn less likely, not more. The doomsayers play up the rise of populist demagogues, with major elections coming in Germany, France, the Netherlands and possibly Italy. For now, however, the center is still holding. Polls show the populist parties are gaining, but are still not a viable threat to win national office as early as 2017. The typically gloomy outlooks for Europe also overlook some major moves toward reform, including the fact that European banks have reduced the debt on their balance sheets from the equivalent of 170 percent of GDP in mid-2010 to 120 percent late last year. That could set the stage for a new lending and growth cycle.

9. The biggest global risk has slipped a bit below the radar: China, the Land of Bubbles. The prevailing storyline is that with a major communist party conference coming up in October, Beijing simply will not allow its mounting debts to disrupt growth or provoke a crisis. Yet the underlying issue remains: China continues pumping out debt with more and more going to waste. Bubbles keep popping up everywhere, most recently in obscure commodities like garlic and glass. Before 2007, it took one dollar of debt to generate a dollar of GDP growth, now it takes more than $4 dollars of debt to produce the same result. The longer this trend grinds on, the more likely the debt driven machine is to stall, and the consensus may be too confident that the economic engineers in Beijing can determine when that moment comes. The fact that no one sees China's debt as a big global risk this year is all the more reason to watch this story carefully.

10. Of the many ways Trump turned old trends upside down, one of the more surprising involves the media. At a time when serious news was thought to be in terminal decline, US consumption of news media jumped 37 percent last year, compared to the year before. And viewership for America's most popular spectator sport, professional football, fell by around 10 percent. Moreover, The Rise of News and The Decline of Sports continued after the November election, suggesting these trends could last well beyond the election season. It's Trump World and the rest of the world is watching this show like never before.