The International Monetary Fund has warned that the deep uncertainty over Donald Trump’s economic policies exposes the global economy to big risks if US interest rates and the US dollar rise sharply, but it also offers potential growth benefits. The performance of the world economy and financial markets may hinge on whether the incoming US president embarks on a risky short-term spending spree that triggers negative global spill overs or implements sensible long-term reforms that deliver sustainable higher economic growth. Another source of potential volatility is the upcoming French, German and Dutch elections in 2017.
Continue reading below:Monthly-Notes-January-2017.pdf
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