As 2016 is coming to its end, it might be helpful for investors to look back at a couple of interesting points that happened this year and try to imagine how these events could impact global economies in 2017.
There is no doubt that 2016 was an extraordinary year with two huge political surprises:
- It was the year of “Brexit.”
- It was the year that Donald Trump was elected to be commander in chief of the United States.
Besides that, it was also the year where the global economy has been more or less in line with forecasts where a not so good outcome was generally expected and it didn’t happen after all where we have seen, relatively spoken of course, pretty decent progress in the Western world and even in some of the emerging economies that have showed some signs of the beginning of a, albeit still tepid and still fragile, recovery.
In simple words, we could say that economically, the overall picture looks acceptable, notwithstanding these 2 major unexpected political shocks.
The big question for 2017 is that we do not know how these political changes of 2016 will affect the overall economy in 2017.
We should not overlook the fact that these 2 shocks were in fact lagging effects of the big financial crisis of 2008 that has made a huge amount of people extremely disturbed and that has made them “distrust experts” that resulted from their anger, doubt and fear.
Besides that, and looking at China it’s also a fact that there wasn’t a hard landing in China and, for now at least, it looks that basically China can keep its system going as long as they can continue to print money and generate debt, which allows them to waste a lot of resources (savings are very high).
Nevertheless, there is no doubt that the underlying growth dynamic of China continuous to slow down and that in 2017 “real” growth could be expected at somewhere between 5 and 6 percent, which is of course not bad when compared to the Western economies.
Now, investors should better take into account that at “some point,” which will be a situation similar to what happened in the West before the financial crisis, their continuous pushing of their coming crisis into the future will come, one day, to an end and that will come at a very high price.
Looking at the euro area, there is a lot of political risk out there that could derail their recovery and make it completely impossible to continue to grow between 1 percent and 1.5 percent as is now the case. It’s also a fact that nobody knows how Italy is going to play out while that situation has the real potential of generating another economic crisis.
We should also not forget there is a French presidential election in May. In simple words, it will be politics that will create new economic risks in the euro area.
Last but nut not least, there is that other big question if “Trumponomics” will cause a surge in global and U.S. inflation.
As things stand today, there is no doubt that inflation is on the rise, but I have my doubts inflation should come back in a very big way as there is still a lot of slack in the world economy.
For investors, it remains important not to overlook that the U.S. is in a different situation than the rest of the world as its inflation is already on target and with the very large fiscal expansion Trump has promised, there is no doubt the Fed will raise interest rates, but, at least in a first stage, probably not as quickly as the latest FOMC dot-plots chart could suggest.
We should not forget that Fed Chair Janet Yellen will have in 2017 no less than 7 FOMC voters at her side that are considered as dovish while there will only remain one hawk, Philadelphia Fed President Patrick Harker.
Because of this, I would not be surprised to see the dollar strengthening less quickly than most expect at the moment.
This doesn’t mean we should expect the dollar to weaken over the short run, which will cause moderately rising inflation in those countries that have weak currencies against the dollar.
Finally, I think it’s still too early to have a good degree of certainty expecting the U.S. to grow at 3 percent to 4 percent in 2017 as Steven Mnuchin, Trump’s designated Treasury Secretary, said about a month ago.
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