The world economy entered 2018 on a stronger footing than many economists and investors dared predict.
Growth is picking up almost everywhere and deflation is no longer feared. Central banks are making themselves less dominant without scaring markets. Japan is no longer a euphemism for failure, Europe is showing some hard-earned vigour, and China isn't unravelling. Even Brazil is looking better.
What could go wrong? Well, a few things:
1. Will the US Federal Reserve make a policy error under its new chair, Jerome Powell?
Janet Yellen flawlessly handled three interest-rate increases and the start of balance-sheet reduction. Tensions will rise if unemployment continues to exceed Fed forecasts and inflation continues to lag them. In that event, the Fed may be tempted to take out some insurance by raising rates more than expected in case inflation shows up. That would be a mistake, a disorienting jolt to investors whose asset-price assumptions are predicated on low rates.
2. Will China's economy hold up?
It was supposed to slow a bit in 2017. That didn't happen, adding to global buoyancy. Most economists have pencilled in a slight slowing in 2018 as the government nudges state-owned companies to lighten their debt loads. But the debt implosion so many naysayers have predicted hasn't happened, giving China the flexibility to play an ever larger role in global prosperity. Key man to watch: Liu He, an economic aide to President Xi Jinping who has accrued enormous power over the policy apparatus. And don't be surprised to see a new central bank governor.
3. Will there be a race to the bottom on corporate tax rates?
The reduction to 21 per cent that was signed into law by US President Donald Trump in December is likely to tempt other developed countries to consider matching or undercutting them. Combined US corporate tax rates (federal and state) will fall significantly below a number of Group of Seven economies, according to Krishna Guha at Evercore ISI. I wrote last month that tax cutting is a likely part of an expansionary shift in global fiscal policy. Let the games begin.
4. Will Trump be provoked?
For all the talk about populism and the anti-trade mood in the US, Mexico's presidential election may represent as much risk to the North American Free Trade Agreement as White House swings between hostility and ambivalence. The leftist front-runner in Mexico's 2018 presidential contest, Andres Manuel Lopez Obrador, won't be shy about going toe-to-toe in social media with Trump. It's not much of a stretch to imagine that Trump, in a fit of pique, announces his intention to quit the trade pact. If the US does exit, a swath of farm-belt states could easily slide into recession.
5. Will politics hurt growth, finally?
The US wasn't the only place where markets and growth got the upper hand over geopolitical ructions in 2017. Both Indonesia and Malaysia are preparing for elections, and political Islam is flexing its muscles in both historically secular countries. Indonesian local elections are held in June, and then the focus will shift to next year's presidential contest. Islamist groups forced the ouster of a key reformist governor close to President Joko Widodo, and have power to get out of the vote and turn people out on the streets. Malaysia's ruling party faces voters by August and is likely to rely on gerrymandering that favours rural, heavily Malay, culturally conservative districts. Prime Minister Najib Razak tried out this line in 2016: Malays would be "beggars" in their own land and Islamic institutions would fall should the opposition take over. Najib's family is part of the old-line political establishment, but he and his bloc have increasingly courted Malay nationalists and Islamists since an intraparty blow-up in the late 1990s.
Happy New Year.