Investment Desk Bulletin

28 February 2017

The year of the 'R'

shutterstock_420856627.jpg

By Pau Morilla-Giner

In this week’s IDB, we consider economic conditions for 2017, looking at recovery, rates and re-leveraging as well as exploring the potential risks beyond this year.

Growth is expected to pick up in 2017, supported by higher cyclical momentum and a US-led pro-growth policy. In the US GDP growth may pick up to 2.5%, however Donald Trump must implement the fiscal reforms detailed in his campaign pledges. The US consumer is in a sweet spot, enjoying the late cycle of recovery. This is echoed in consumer spending, with an increase of 2.9% real spending growth year on year.

Inflation is steadily increasing, however worries about this climb accelerating may be premature as core inflation remains stable. US Inflation is nearing 2%, driven by higher energy prices. The Federal Reserve have forecast 3 rate hikes this year, but the impact of a strengthening US Dollar has already led to a tightening of monetary conditions. A faster normalisation of Fed rates has the potential to unsettle markets.

Financial conditions are improving in the Eurozone, however, given the rise of populist parties and the 2017 election calendar, political risks remain high. In France, Marine Le Pen has promised an EU referendum and an exit from the Euro; according to the polls, the probability of Frexit is low but the global economic implications are significant, especially for French debt.

China and Emerging Markets have enjoyed a period of stability so far this year, but this could be challenged if President Trump aggressively pursues trade tariffs. Increasing political instability, excessive US dollar strength and rich asset valuations will pose as challenges for beyond 2017.