Goldman Sachs examined the key Trump policy proposals — higher tariffs on trade, curbing illegal immigration, increased federal stimulus, tax cuts for corporations and Americans — and found that while the plan would give the US a short-term bump in GDP growth, it would be a drag on global growth. The near-term effects are positive because the fiscal stimulus package boosts US demand and this has positive spill over effects to other economies. However, the longer-term effects on US growth are negative because the fiscal boost peters out and the other policies — higher tariffs, reduced immigration, and tighter Fed policy — weigh on growth. The policy proposals have negative spill over effects on other economies, especially in emerging market economies with partially fixed exchange rates or US-dollar based economies. The reason for the greater impact there is that the Trump agenda is likely to result in higher US interest rates and therefore a stronger dollar. Essentially, lower imports to the US and a stronger dollar from Federal Reserve rate hikes, combined with higher servicing costs for debt held in dollars, would curtail economic activity, especially in emerging markets, and drive global GDP lower than it would be otherwise. Global growth is expected to be 0.1% lower annually than the baseline projection without Trump’s policies by 2020. While this may not seem like a lot, global growth was at only 3.1% for 2015, and analysts call anything under 2% growth a global recession, so there is little room for negative shocks.
Continue reading below:Monthly-Notes-December-2016-continual.pdf
The lack of inflation and the possibility of deflation has been the focus of central banks around the world as they cut interest rates and then embarked on non-conventional monetary policy such as quantitative easing in an attempt to stimulate growth and push prices higher.
However, inflation is seemingly at an inflection point. The word ‘deflation’ may exit the financial lexicon over the coming months as commodity prices stabilise and global excess capacity is slowly reduced, and investors position for modestly higher rates of inflation.
Inflation in both the UK and the US has reached the highest rates in almost two years at 1.0% and 1.5% year-over-year respectively. In the US economy the rise in the price of oil over the last year is filtering through into higher energy costs, meanwhile the UK inflation rate got an additional boost from the tumbling value of the pound.
continue reading below:Monthly-Notes-November-2016.pdf
Since the Global Financial Crisis (GFC), central banks have relied on experimental monetary policies. However, these policies have more of an impact on financial markets rather than economic fundamentals. Asset prices have been driven higher to the point where valuations for global equities, fixed income and housing markets are at or near record highs. Quantitative Easing (QE) had become the tool of choice for most global central banks needing to promote economic growth and inflation when lower interest rates have failed. Unfortunately, QE has not been as successful as hoped in achieving its key objective. Global growth has slowed and price inflation remains well below target in the vast majority of developed nations. We may now be at an inflection point. The Bank of Japan’s (BoJ) September meeting was a key turning point in central bank policy where it changed its monetary framework from targeting the monetary base to focusing on yield curve control. Under its new policy framework, the BoJ will buy and sell long-term bonds in order to keep the 10-year bond yield at 0%. This means that if 10-year government bond yields fall below 0%, the BoJ will actually have to sell bonds rather than buy them, which effectively amounts to quantitative tightening, not easing.
Continue reading below:Monthly-Notes-October-2016.pdf