While the Trump-inspired “reflation rally” has continued, it is now more due to the underlying expansion of the US business cycle than to any Trump effect. In my view, the US expansion should be able to continue for several more years, creating the basis for further upswings in equities, real estate and other risk assets as the expanding GDP or total spending is reflected in higher corporate and household earnings. I see only limited upside for commodities in 2017 as the surge in US shale output keeps oil prices under pressure while there are no signs of US President Trump’s infrastructure spending plans materialising any time soon.
The main risk to the scenario of an extended US upswing with an accordingly positive impact on risk assets is that the US Federal Reserve (Fed) tightens credit too sharply, not by raising interest rates but by curtailing credit growth in the private sector. We can expect the Fed to raise interest rates once more in 2017 and to start shrinking its balance sheet in October or November. The US economy is expected to grow by a real 2.1% year-to-year in 2017 and by 2.4% in 2018, with President Trump’s target of “at least 3.5% and as high as 4%” real GDP growth achievable only if there is an “extraordinary shift in performance” of hard indicators such as profits and revenue growth or industrial production, which have been lacklustre.
Meanwhile, the recovery in the US has been percolating out to other areas, with better performance in Europe, Japan and non-Japan Asia owing much to spillover effects from the US upswing. In the Euro area, growth has improved and the hurdle of political elections with a serious populist threat to the established parties has been passed without jeopardising the Euro currency system.
As in the US, sentiment in the Eurozone has been running ahead of reality. One continuing problem is the European Central Bank’s choice of QE strategy – buying securities from banks instead of non-banks, thus failing to boost the purchasing power of households and companies. We forecastsreal GDP growth of 1.7% for the Eurozone in 2017.
Japan and China
While the Japanese economy has seen slightly better growth, inflation remains far below 2% as the combined policies of Prime Minister Abe and Bank of Japan are missing their targets.
Meanwhile, China has continued to alternate between squeezing and easing credit with the aim of keeping the economy on the rails ahead of the autumn National Congress. While external trade figures have improved slightly, overcapacity in basic industries such as coal and steel and non-performing loans in the banking system are constraining the growth of new investment. A 6.5% real GDP growth in China for the year as a whole can be projected.
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