We sit in London looking out on the office blocks of the financial services community and that does give a bias to be drawn to read the Brexit blurb in the press but 2017 will raise issues which transcend the UK’s self-imposed uncertainty of stepping out of one trade bloc in the hope of creating its own. Brexit has yet to formally commence although we now know how to do that. We will continue to watch and worry over its development for several years.
The themes we can expect to develop to some tangible outcome during 2017 are bank regulation and the shift of power in the USA from the liberal, globalising Democrats to the USA focussed Republicans.
The finalisation of Basel 3 inspired changes to bank regulation will accelerate. The deadline has been set for several years as 1 January 2019. The final arguments over the detail are now being fought as regulators try to balance the will to be seen as technocratic enforcers of a troublesome sector of the economy with the growing realisation that not all economies have the same concept of enforcement. Although we are all signatories to the same Pittsburgh G20 Summit, the sense persists that some regulators may be softer than others and in particular where intra G20 member competition may arise.
While Basel 3 develops, the imposition of IFRS9 will cause banks to begin to hold capital against bad debt even for the debts which have not gone bad. This must affect both the capacity to lend and the cost to borrow and also must affect the real economy’s appetite to spend. Exposure to such constraints may go some way to seeing through the varied reasons offered by the real economy for holding cash although that has become an increasingly expensive option.
Mr Trump’s accession creates greater uncertainty day by day, Tweet by Tweet. Expansionist government spending is seen as benign but perhaps only for USA businesses. A trade war with China may upset other western economies’ relationships with their reliance: on cheap manufactured imports; on expensive manufactured exports; and as a willing buyer of foreign assets and foreign government debt.
The expressed will to cancel sections, if not all of Dodd Frank suggests that the Pittsburgh Summit may not have been one the current Republicans would have endorsed. The Paris Climate Agreement may not have been another.
What certainty we have is that Mr Trump will want to be seen to be doing something.
And then we must see what the effect may be on the Brexiting UK of Dutch, French, and then German elections on that large trade bloc with which it has an unmovable border and substantial trade.