2017 was in many ways a dichotomous year for the global economy. Putting aside the perennial basket cases, the likes of Somalia and Zimbabwe, which continue to straddle the bottom, 2017 had finally seen broad-based global growth. More importantly, growth was also fairly synchronised among the developed countries.
The US, Western Europe and industrial Asia had all seen strong growth in 2017. Ten years after the 2007/2008 US subprime induced global recession and after years of tepid growth, 2017 appeared to be the year growth really turned the corner.
Global economic growth is expected to exceed 4%, a very strong performance by recent standards. Stock markets in the US, Europe and elsewhere are at historic highs. Interest rates, despite three hikes in the US, continue to be near historic lows.
Accordingly, corporate earnings have risen spectacularly in the case of technology firms. Asia’s two giants, China and Japan, have also done well.
Abenomics appears to have at least brought temporary relief to the long suffering Japanese economy. Surprisingly, despite the red hot growth in the developed countries, inflation is still tame. Technology, it appears, has brought down prices by breaking the barriers to enhanced efficiency. High growth and low inflation is indeed the economic sweet spot.
Worsening Political Situation
While developed countries have had a good year, the Muslim world, by both economic and political measures, appeared to have had a fairly miserable 2017. With a few exceptions like, Malaysia, Indonesia, and perhaps Turkey which had a 5% plus of gross domestic product (GDP) growth, the traditional powerhouses, Saudi Arabia and the Gulf Cooperation Council (GCC) countries have had quite a dismal year.
Going by International Monetary Fund (IMF) statistics, these countries have had near zero growth in real GDP, despite some firming of oil prices to about US$60 (RM232.80) per barrel. More than the economics, the political situation — already bad — worsened in 2017 for the Muslim nations of the Middle East.
Syria, Iraq and Yemen seem to be spiralling even deeper into misery. In addition to selfinflicted problems domestically, Saudi Arabia is witnessing squabbles within the GCC grouping it heads. Turkey’s post-coup challenges seem to be continuing even after 18 months. Iran, which until recently seemed tranquil where domestic politics is concerned, has seen demonstrations. The ongoing crisis with Rohingya Muslims in Myanmar continued in 2017 with no end in sight. As if to add salt to a festering wound, the American decision on Jerusalem exposed the true weakness of the Muslim world.
The impotence of Muslims’ global political power and lack of effective leadership, despite enormous potential economic power, in dealing with crises that plague the ummah is regrettable. In this context, the recent leadership role of Turkey President Recep Tayyip Erdogan in attempting to forge a consensus among Muslim leaders regarding Palestine is a noteworthy signal that holds hope for the unity of the ummah in the future.”
Overall, while 2017 may have been a goldilocks year for the economies of the US and the developed world, much of the Muslim world had continued in malaise. Even the spectacular growth seen in prior years within the Islamic banking and capital markets space had been faltering in 2017.
Looking ahead to 2018, the IMF forecasts global growth to be at 3.7%, fairly close to the 4% seen in 2017. For the financial sector of the developed world, in particular the US, it is hard to see how post-crisis recovery, now beyond 100 months, can continue much longer.
Many economists worry of the US yield curve inversion which is claimed to signal investors’ scepticism about longer term growth. Furthermore, with unemployment rate near 4%, capacity is constrained and wage inflation is likely. With consumption and not investment leading growth globally, inflation could be a concern.
The geopolitical problems of 2017 will not simply disappear this year, thus, the economic sweet spot and the stock market bubble may not last. Keep in mind that global debt is at alltime high, and the many underlying causes of the last global recession remain unresolved. The hope for the restructuring of the financial sector never really happened. The tough regulatory initiatives then proposed, have also been pushed back. If the end of every boom is signalled by the advent of hare-brained investment ideas, bitcoins may just be the thing this time.
For the Muslim world, the new year may not provide much relief. Politically, there is little to be optimistic about, particularly in the Middle East. The situation in Yemen, Syria, Libya and Iraq appear nowhere close to resolution.
Economically, the challenges will continue. Oil prices, though marginally higher, are unlikely to recover to US$100-plus levels seen previously. Technology’s progress with electric cars, solar energy, fracking and the like, which had in many ways provided the tailwind to developed economiesm will constrain the world’s need for oil.
Thus, fiscal pressures on oil producers is likely to continue. Besides oil, the Muslim world is largely made up of commodity producers. In a world that emphasises knowledge and places a premium on technology, commodity producers are bound to be relegated further down the food chain.
Many have attributed the recent slowdown in Islamic finance growth to the falling of oil prices. If so, 2018 does not promise to be a great year for Islamic banking and finance. For its own rejuvenation and to truly contribute to the Muslim world, Islamic finance needs to move away from merely replicating debt contracts to risk-sharing contracts. Failing this, the path to convergence would be hastened.
- Dr Obiyathulla Ismath Bacha is currently professor of finance at the Malaysia-based International Centre for Education in Islamic Finance. The views expressed are of the writer and do not necessarily reflect the stand of the newspaper’s owners and editorial board.