27 Feb 2017

Beware (but not too wary of) the Ides of March

Philip Shaw

Chief Economist

A number of key events take place next month. Indeed the 15th March (the ‘Ides’) alone sees an FOMC decision, the expiry of the US debt ceiling suspension and the Dutch elections


A number of key events take place next month. Indeed the 15th March (the ‘Ides’) alone sees an FOMC decision, the expiry of the US debt ceiling suspension and the Dutch elections. And in the run-up to the next G20 meeting on the 17th/18th, we hope for some clarity from the new US administration on how it will set about framing policy over trade related issues. But despite these uncertainties, and that the Presidential elections in France loom large in late-April/early-May, markets continue to view the glass as half-full. Indeed our baseline forecast remains that global GDP growth will strengthen to 3.6% this year from 3.1% last.
United States

Since Donald Trump’s election victory most indicators have pointed to continued growth and some even to an upturn in the pace of activity. Uncertainties over the fiscal and regulatory changes that will eventually be implemented by the Trump administration are likely to persist for some time. Hence we suspect the Fed continues to assess appropriate policy meeting by meeting. Fed communications have given little hint at a 15 March rate move whilst the prospect of a battle over the debt ceiling (suspension expiring 15 March) is another dissuasive factor against a prompt move. And note that Q1 GDP figures due at the end of April could also put a stop to a May rate move. Hence we still see June as most likely for the next hike. The Fed also has a big decision on whether to keep reinvesting some $400bn of maturing Treasuries next year.


While the anti-EU PVV leads in the Dutch polls, it seems almost unthinkable that events unfold to take the Netherlands out of the EU. The French Presidential election on 23 Apr and 7 May has markets more exercised on concerns that a Marine Le Pen Front National (FN) victory is not to be totally ruled out, leading to a referendum on EU (and therefore euro) membership. These concerns have hit the Euro and lifted French OAT yields. But we note the constitutional backstops, which would likely keep France in the EU. There is also a German election scheduled for 24 September too. Despite the busy calendar we remain of the view that any major political earthquakes will be avoided and that a solid enough growth outlook and strengthening inflation will lift the Euro after an initial sag as the ECB prepares to taper QE purchases. We look for €:$ at $1.14 end-2017.
United Kingdom

We think that a (modest) slowdown in UK growth is imminent. The latest retail sales data suggest that rising inflation is beginning to weigh on household spending. Meanwhile, business investment is falling, perhaps as a result of Brexit-related uncertainty. The weaker pound should support net exports this year, but signs from the (volatile) data have been mixed. So, while growth momentum in H2 last year will provide an uplift to calendar year GDP growth (we expect 2017 growth of 2.0% versus 1.8% in 2016), we are expecting the quarterly profile to sag. Sub-par growth and muted domestic price pressures should keep Bank rate on hold until at least the end of 2019. In the near term, the government is still on track to trigger Article 50 in March (surely not the 15th!?).