When the UK voted to leave the European Union, there was a strong consensus that proximate economies would suffer the macro fallout – Ireland, Belgium and the Netherlands were all expected to take a hit, and in particular I recall speaking with business leaders in both Brussels and Amsterdam at the time and registering their concerns for the local economy. In fact, Brussels was strengthened as a political capital by the way in which it managed the Brexit process, and Amsterdam has been bolstered as a financial capital by Brexit.
Returning to both cities, which sadly are off my well beaten track, I found great curiosity regarding the vision and tactics of Donald Trump. Like Brexit, Trump’s first term was about smashing globalisation, whilst his second term is an attempt to create a new world order, or at least a new American role in the world order.
The prosecution of his tariff strategy has been chaotic and unpredictable, and there are signs that the DOGE project to cut costs in the government sector is simply disruptive. As a result, policy uncertainty has spiked higher. For example, the Economic Policy Uncertainty index has shot to levels seen only during COVID. As such there is great concern that the US may tip into a recession or even that this is the express policy of the administration, with the goal of reducing borrowing costs (see ‘Un train peut cacher un autre’).
Neither the annihilation of the state nor tariffs may cause a recession, but uncertainty might. In this context, a very well regarded, though complex economics text worth knowing of is Avinash Dixit’s “Investment and Hysteresis’ appearing in a 1992 edition of the Journal of Economic Perspectives, and later as a book co-authored with Robert Pindyck. Avinash spent much of his career at Princeton and is a kind, softly spoken and thoughtful economist, in contrast to many of the more head-line grabbing varieties of the species we hear from on social media.
One of Dixit’s pre-occupations was the ways in which companies made investment decisions, and to summarise his findings in a crude way, he noted that firms often didn’t react immediately to a change in economic circumstances but opted to ‘wait and see’. As a result, an environment of high economic uncertainty produces inertia on the part of companies (and investors), but this can be beneficial to them as it gives them the option to wait and see how that environment develops.
We are in a ‘Dixit’ moment, where companies are beginning to stall investment plans because of the uncertainty emanating from the White House and the ever deeper fracturing of trade and diplomatic relationships across the world. In financial markets there is a risk that the capital market pipeline remains constipated as mergers and initial public offerings are stalled.
Similarly, the growing uncertainty of America’s diplomatic and military intentions is causing nation-states to change course. For example, Portugal has just cancelled an order for F-35 fighter jets and will instead buy European planes, while the centrepiece of Australia’s military strategy, AUKUS, is in disarray.
It is difficult to tell how long this ‘Dixit’ moment persists, and much depends on the Treasury and White House being able to communicate a clear economic strategy. Notably the administration has been silent on its intentions towards China, which strikes me as odd given that many members of the administration are united in their antipathy towards America’s geostrategic rivalry (Marco Rubio for example published ‘The World China Made’).
Until we have this clarity, markets will remain jittery, macro data will be unpredictable and activity will err towards the softer side in the US, but perhaps not in Europe where strategic clarity and ambition are picking up from low levels.
Granted that far too much of the macro debate focuses on the big multipolar zone (US, Europe and China), one of the pleasures of my visit to Amsterdam was the chance to meet with David Skilling (the expert on small, open economies) and also serendipitously with Afshin Molavi (the expert on ‘the other 75%’, by which I mean the emerging world economies). It is worth focusing a little on how both of these groups are adjusting to a changing world.
Many small open economies are now in a state of high alert, sceptical of the strategic consequences of the actions of the large nations. In many cases, they are mobilising militarily – the Nordics and Baltic states are an example, and in a recent note I detailed how Singapore, though it is one tenth the size of County Cork, it has an active army nearly ten times the size of that of Ireland, and a reserve army of 250,000 well trained soldiers).
At the other end of the spectrum, large populous emerging countries (think of Indonesia, Nigeria and Bangladesh) are worried about the fallout of the US-China rivalry, but in many ways non-aligned and ambitious for their own economies. On a more positive note Afshin and I think that our ‘4th Pole’ thesis – that the greater economic region linked by the UAE-Saudi Arabia and India – has the makings of a new pole of economic activity.
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