The election of Trump after Brexit signals that the dream run of globalization is over, and now the latest fashion is economic nationalism. Each country will try and get jobs back for the local population as their political mandates change. In the process, they will generate inflation in the near term as traditional supply chains are disrupted and jobs brought back to the country will have to employ relatively expensive labor. At the same time due to aging populations we will have less and less employable and taxable population and more consumption not financed by current income rather than previous income.
Using our proprietary method we have ranked key countries/economic zones which are the most vulnerable to this change, mainly due to the debt overhang, in the order of being the most at risk to the least at risk, as follows:
The countries vulnerabilities will depend on their debt levels as it impedes growth process,economic dependence on trade, ability for country to allow for decrease in social contracts and energy security.
Also any further monetary and fiscal policy solutions will lead to inflationary pressures so even these solutions are reaching a limit.
The debt levels in the above countries necessitate reduction in the provision of social contracts. The ability of these countries to cope with reduction of social contracts depends on social cohesion, immigrant population and aging populations.
Japan, Euro Area, United Kingdom and China will be most affected as they are highly dependent on trade and as the trend shifts away from globalization we will see emergence of billateralisation as the new force among nations. Bilateral deals take time in negotiations and have to take into account geopolitical realities, thereby not a frictionless process.
Japan already has efficiently struck bilateral trade and investment deals. It has no issues relating to immigrant population and the social cohesion ensures that the government will be able to reduce their social contracts to the people even though the dependency ratios are high.
Euro Area also has aging populations and is allowing immigrants but this has led to deep divisions and with the rise of right wing parties there are increase in risks. The ability of Euro Area to strike trade deals has diminished after Brexit as everyone fears the Eurozone may be heading for a breakup.
United Kingdom after Brexit has the flexibility and political urgency to undertake fundamental reforms. Its debt levels are high and will thus impede growth but its ability to strike bilateral trade deals is a key factor as it has recently demonstrated with India.
China is an economy with excess structural capacities and aging population but has high savings rates. These savings are not finding productive investments as the government has propped up only two investment opportunities for the common man i.e. Real estate and stock market. As for social cohesion for a country whose internal security budget is higher than external security budget, the risks are high also as the Chinese miracle has benefited mainly the Han Chinese creating more possible flashpoints for unrest. There is also the issue of the shadow banking sector where the magnitude of problem is uncertain. At the same time, the Chinese government recognizes these issues and is not bound to any ideology and is allowing for creative solutions. The ability to find any solution that works and the agility to implement those solutions is what goes in favor of the Chinese government, provided the rest of the world is as accommodative to China in the future as it was in the last two decades.
Only India remains a bright spot in the world economy as it has the lowest debt and has been growing at above 6% despite not having struck any favourable trade deals. The demographics will add labor force to the economy and the savings rates are at an acceptable range. The current government has shown penchant for taking risky but essential decisions. Since India is less dependent on exports than most other countries, the DeGlobalization trend will not affect India as adversely as others, and other positives mentioned will outweigh this negative.