Economic growth around the world, particularly in terms of increasing income growth, investments and international trade, suggests reasons for optimism about the future of global financial markets.
“The current global economy, where it stands, is in a very sweet spot,” said Christine Lagarde, Managing Director, International Monetary Fund (IMF), Washington DC. But Lagarde warned about global markets and policy-makers becoming too complacent. Indeed, there are both economic and political challenges that could introduce volatility in the medium to long term.
Regarding the dollar as the global reserve currency, some US policy-makers have suggested a weak dollar could be beneficial for the US economy. “In the short term, there are obviously benefits and issues with a lower dollar. It is beneficial for our trade imbalances, but there are issues with those holding dollars,” said Steven Mnuchin, Secretary of the Treasury of the United States. “I fundamentally believe in the dollar. I believe it will remain as the reserve currency given the strength in the US markets.”
Whether the dollar continues to play the role of reserve currency depends, in part, on whether the rest of the world shares an optimistic view of US markets. “I think over the long run, we do have to focus on [the fact] that we are a user of other people’s balance sheets to fund our economy,” said Laurence D. Fink, Chairman and Chief Executive Officer, BlackRock, USA.
Because of the interlinkages between global economies, geopolitical tensions and trade wars could have a ripple effect. Brexit, for example, raises questions about London’s status as a global financial capital and the economic relationship between Europe and the United Kingdom and, thus far, policy-makers have offered little clarity on that relationship.
“The uncertainty that we currently have … is just poison” for financial markets, said Paul Achleitner, Chairman of the Supervisory Board at Deutsche Bank.
One way of reducing uncertainty is to establish a transition period during which financial institutions can continue to operate according to a clear set of regulations. “The UK economy has performed a lot better than most people thought it would after the referendum” on Brexit, said Philip Hammond, Chancellor of the Exchequer of the United Kingdom. Hammond encouraged a three-year transition period to ensure a smooth Brexit. He predicted that the economic growth forecast for the United Kingdom would be upgraded once policy-makers resolve questions about the Europe-UK relationship.
The central role of China in the global economy is not a new story, but the possibility of opening Chinese capital markets could dramatically alter the global financial system. “We want [China] to open up, it has a massive amount of savings,” said Jin Keyu, Professor of Economics, London School of Economics and Political Science, United Kingdom. “And yet, it’s going to introduce so much volatility.”
The runaway success of crypto-currency in recent years has many established financial institutions playing catch-up on financial technology. It also has regulators concerned about how to prevent money laundering and the financing of other illegal activities. The positive side of crypto-currency is that new financial technologies could bring banking to the 2 billion people who currently lack access to services such as savings accounts. Greater inclusion in financial markets is essential to reducing inequality as well as promoting long-term economic stability.