Global growth to avoid hitting the wall…

27 Jan 2017

Philip Shaw

Chief Economist

Following Donald Trump’s inauguration as the 45th US President he wasted no time in starting to execute his ‘America first’ policy promises. Global markets have taken this as a sign the President will aim to deliver on his key market relevant promises including cuts to corporate taxes.

Global
Following Donald Trump’s inauguration as the 45th US President he wasted no time in starting to execute his ‘America first’ policy promises. Global markets have taken this as a sign the President will aim to deliver on his key market relevant promises including cuts to corporate taxes. That has helped global markets hold onto their initial wave of ‘Trump reflation’ optimism that followed his election victory. For now the wider implications of Trump’s ‘America first’ stance for global protectionism remain in the background, but pose downside risks. Our central case is for an acceleration in world GDP growth from 3.1% last year, to 3.6% this year and 3.9% in 2018. The spectre of deflation looks well and truly banished and energy prices are on the cusp of pushing up on headline inflation rates. Meanwhile, fears of a Chinese ‘hard’ landing are still at odds with the data which point to a pickup in growth over recent months.

United States
We expect Congress to rein in Mr Trump’s pre-election tax and infrastructure spending ambitions. But even after Congress’s checks and balances we do expect the President to deliver a meaningful fiscally supportive package alongside deregulation. With this built into our forecast we envisage US growth of 2.8% this year and 2.9% next. Note that we see the Fed continuing on a path of ‘normalisation’ through 2017, although we note that over the past two years it has overestimated the pace of tightening it will deliver; we expect two Fed hikes this year.

Eurozone

Euro area inflation picked up sharply in December from 0.6% to 1.1%, largely due to energy price effects. However it is the rise in German inflation towards target that has generated more headlines, given a number of calls for tighter ECB policy. Despite those calls, we do not foresee the ECB undertaking any change in policy rates until 2019. We do however suspect that a stronger growth and inflation backdrop will prompt the ECB to announce a tapering of its QE programme in Q4 this year, to take effect in 2018. Additionally we forecast the euro gaining ground as the gradual move away from ultra-loose policy supports the single currency. Our end 2017 €:$ target stands at $1.14.

United Kingdom
Following some government elucidation over its Brexit plans, Parliament is preparing to debate a Bill over Article 50, following the Supreme Court’s decision that an Act of Parliament is a prerequisite for this to be invoked. While the timetable for the process is not totally clear, it seems as though the Bill might gain Royal Assent in early to mid-March, with the government on track to trigger Article 50 by the end of the month. The economy maintained its momentum at the end of 2016, with Q4 GDP growth of +0.6%. But it is disappointing that, as yet, there are few signs of a positive export response to the lower pound. Sterling seems to have shrugged off its most recent weakness which had taken it below $1.20 for a short while. We reiterate our end-year call of $1.35 against the dollar and 85p versus the euro. But a recovery in the pound could put a dampener on UK stock indices via the valuation of overseas earnings.