That was the year that was

It has truly been a historic year, the reverberations of which will echo for years to come. Above all, 2016 was the year of politics and will primarily be remembered as the year when electorates in the west decided that enough was enough. And who can blame them? Governments have spent the past seven years trying to convince their electorates that normality is just around the corner, when in reality they should be preparing for the new normal. Conventional countercyclical policy is battling against the headwinds of globalization and rapid technological change, which add up to make this the most unsettling period that many of us have ever experienced.

The geo-political environment is in a state of flux as the tectonic plates of the post-1945 order move again. Far from this being the end of history, as Francis Fukuyama once predicted, we are closer to Yogi Berra’s aphorism that it’s déja vu all over again. Precisely at a time when strong political leadership is called for, we find it is sadly lacking.

In the UK David Cameron – a deeply flawed leader who gambled his country's economic future for short-term political gain – has been succeeded by Theresa May, who gives no public indication that she understands the complexities of negotiating Brexit. In France, President Hollande is the most disliked president in French history, to the extent that he will not stand again next year because he knows he cannot win over the people. There is indeed a non-negligible probability that the French could elect a far-right president next year in the shape of Marine Le Pen, although I would not put money on it. Italian PM Renzi quit after his proposals for constitutional reform were rejected in a referendum which ended being a plebiscite on his own term of office. Only Angela Merkel is still standing tall, but even her popularity could take a tumble in the wake of recent events, as her open borders policy is increasingly scrutinized. With an election due in the autumn, the world will be watching to see whether Germany can uphold the values of liberal democracy which are being eroded elsewhere.

Meanwhile, the political situation in the US is almost beyond parody. Although the economy has recovered more rapidly than most, Barack Obama is unlikely to go down as a great president. A great orator he may be, but he has failed to offer the leadership that the western alliance so badly needs. Whilst his policy of avoiding military entanglements was taken for sound reasons, his Middle Eastern policy has been a failure, and if anything has made a bad situation worse. His attempts to reset relationships with Russia have also been a dismal failure. Moreover, he spent a lot of time and effort battling Congress on basic economic issues such as the debt ceiling (though that is more the result of Tea Party influenced ideology than the president's stance). But as sub-standard as Obama may have been, the election of Donald Trump represents a leap into the unknown. It is a measure of the dissatisfaction which many Americans feel that they are prepared to give the keys to the Oval Office to someone who lied and exaggerated their way through the most unedifying presidential campaign in history.

Vladimir Putin and Xi Jinping can at least look forward with more optimism. Putin has restored some prestige to Russia's tarnished image, and although the economy will continue to suffer from the sanctions which are still in place, he will be taken more seriously on the global stage following Russia's intervention in Syria. China's President Xi will continue to preside over the world's most dynamic large economy as he consolidates his domestic power base. There will be difficulties ahead, however, and as both leaders look to reassert their country's position on the world stage, we will need a cool head in the White House to ensure that matters do not get out of hand. It may indeed be the year when we learn the true value of President Obama.

It is against this backdrop that the world economy will continue to operate and I will save the 2017 economic outlook for another post. What 2016 has taught us, however, is that the shape of the risk distribution has changed. Outcomes which we thought implausible are manifestly not. The good news is that there is profit in uncertainty. Apparently, the bookmakers’ joint odds that the UK would vote for Brexit; that Trump would be elected US president and that Leicester City would win the English Premier League were 4.5 million to one. Paddy Power is offering odds of 33/1 that the existence of alien life will be proven in 2017 (2016 odds are quoted at 80/1, so you have less than a day to place your bets). Meanwhile, Fergus Simpson, a mathematician at the University of Barcelona, reckons that there is a 500/1 chance of a cataclysmic event wiping out human existence in any given year during the 21st century (Don’t believe it? Go here).

Above everything else, however, we have learned not to trust bookmakers odds (a remain victory or a Clinton presidency anyone?) And as Michael Gove so memorably remarked, we have all “had enough of experts” (although only until they are proven right).