Cees Bruggemans: The ‘What Ifs’ – uncertainty the only outcome

The saying goes, expect the best but make sure you’ve planned for the worst because you just never know what lies around the next corner. In this note, Cees Bruggemans looks at the global ‘what ifs’. What if things do go to the next level. He clarifies that these aren’t forecasts or predictions, just questions – with uncertainty the big winner. – Stuart Lowman

by Cees Bruggemans*

Cees Bruggemans
Cees Bruggemans

What if things progress a bit more than now foreseen? Taking things to the Next Level. Where could that lead?

What if the Chinese adjustment is more robust, deeper and more prolonged? The commodity producers’s recessions more challenging, and many Asian and African Emerging Markets making bigger downside adjustments? Europe relatively safe this winter but from next Spring facing a rising flood of refugees, far in excess of 2015 numbers (counting in the low millions?), rejigging her political game, with what kind of economic consequences? Would all this create enough uncertainty to affect American financial markets and business decision making, inviting a defensive pullback and confronting the Fed with the need to once again turn more accommodative?

All these diverse questions together might have the potential of overwhelming the recovery tide in the developed markets? That would lead to rather different outcomes than now envisaged.

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I am least perturbed about American domestic demand strength. Despite her markets also experiencing bouts of volatility, her demand recovery remains robust and not easily deflected.

China offers a bigger question mark, with proponents of greater weakness and lingering strength giving battle. China is still adjusting but isn’t necessarily an growth implosion in the making. Still, she bears watching. Hers is an industrial adjustment even as her services and consumption dimensions continue to grow.

Commodity producer recessions and struggling EMs everywhere may be a bigger story than so far discounted. Uglier for longer, as the commodity playout is more pronounced and the Chinese import and export adjustments keep hurting EMs more than so far allowed. Japan is a combination of Chinese impact (on exports) and domestic consumption withdrawal (tax and imported prices based).

The latest surprise, and greatest unease, concerns Europe. Confronting budget and debt issues of recent years is one thing, but the human drama unfolding on her flanks could be of a different magnitude. And there is the industry-specific VW imbroglio still spreading her impact, especially in Germany.

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The immediate Russian menace seems to have quietened down (possibly only resting in the Ukraine). The devolution debates aren’t in focus (Scotland, though the Basques are coming into view now). Exits from the common governance frameworks (Grexit, Brexit) are currently not front page.

Europe has experienced many periodic migration flows inviting social and political heat. In decades past, Italian, Algerian, Iberian, Turkish, Moroccan, West Indian and East European waves of varying intensities were absorbed.

In recent years, a steady flow has been coming from Africa, the Middle East and further afield, causing much debate, regarding integration problems and cultural differences and consequences.

This flow has turned into a flood these past three years, with a million refugees and immigrants expected this year. Feeding this growing stream are push factors such as conflict (war, civil war) and failed economic development; and pull factors (high European living standards and social benefits).

Indeed, Russia has turned south, teamed up with Iran, Iraq and the threatened regime in Syria, in an anti-terrorist alliance that differs from Western efforts. Will they stay at cross-purposes? Will the war devastation still spread, intensify, creating more displaced population? Will European efforts to turn conditions in Syria be doomed to failure? Will it suit Russia and Iran to feed these pressures, inviting less pressure on themselves elsewhere?

Europe has a population of nearly 500 million, and has therefore some capacity to absorb refugees and immigration. But unemployment is high, integration is often challenging, the incoming human capital only in parts middle class with professional skills or crafts, otherwise often very lowly educated and skilled, and not easily productively absorbed, though adding to social and political strains.

The real question that has been uncorked here lies in numbers. A few hundred thousand annually, spread over the continent, is one thing. Cloudburst entry on a much bigger scale something quite else.

Some 4 million Syrians (out of an 18 million population) are currently in camps in Turkey, Lebanon and Jordan. Many would like to go West, given that there are no other alternatives and an endless camp stay without any prospects where they are now.

The problem may be yet bigger. Global estimates of displaced peoples run at 60 million. Large populations (eg Syria, Iraq, Eritrea, Armenia, Afghanistan) are restless. Immigrants come from much farther afield, too, such as West Africa, Bangladesh and Pakistan.

The majority of these aren’t refugees but immigrants without the necessary papers to win legal entry into Europe. Yet still they come, and the stream turning into a flood.

The issue over the next few years is whether Europe remains open, or closes up, with what kind of social, political and governance consequences. Can Europe find enough commonality to find answers, or does this issue prove to be the lever working for its falling apart?

What are the financial market and economic consequences of this debacle? Can the flood be stopped or will it be channeled in acceptable ways? If not, do we find yet more exits and devolution shaping, to the point of tearing up the entire edifice? And is this accompanied by an effective loss of economic policy and increased uncertainty and business defensiveness and withdrawal, with what kind of fallout?

With autumn 2015 already advanced, and miserable winter just around the corner, the Balkans and the Mediterranean sea conditions will become real barriers to people movements (presumably), though these refugee streams likely remaining elevated, with likely much increased loss of life compared to the past few years.

The real test will come in Spring 2016.

If summer 2015 was marked by Chinese unsettledness and financial turbulence, will this linger and become reinforced by a European variant from Spring 2016?

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If it is, what backwash effects will be experienced elsewhere, including America? Would these effects be intimidating enough to shift the global policy debate? Would global economic and financial forces unite and overcome innate American demand strength, to the point of inviting the Fed to be very, very careful about what it does next?

The nightmare of wanting to ignite policy support with interest rates still near zero, a Fed balance sheet of $4 trill, markets sounding increasingly immune to yet more liquidity pushing, and fiscal policy politically off bounds (it is an US election year).

Indeed, could all this stuff have a bearing on the outcome of the American Presidential election in November 2016, seeing that really serious campaigning will be underway from Springtime through the summer into autumn.

These aren’t forecasts or predictions. Just questions. Uncertain outcomes.

*Cees Bruggemans, chairperson, Bruggemans and Associates, Consulting Economists

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