Macroeconomic picture - April 2017

Extension of the growth cycle against a backdrop of major political uncertainty

• The economic backdrop is still positive. Business climate indicators have been solid since Donald Trump was elected and, although some real data is more mixed, job creations continue at a sustained level, which is enabling wages to increase slightly. For now, core inflation remains under control.

• Despite high expectations, visibility on the economic policies Donald Trump may implement remains poor. Some of his campaign promises (like repealing Obamacare) have already been thwarted by divisions within the Republican party.

• It is likely that consensus will at least be reached on tax cuts and deregulation (particularly on finance, the environment and healthcare), which will have a stimulative impact on the economy in 2018. However, with regard to the implementation of major protectionist measures, uncertainty is very high.

The economic situation is holding up better than expected. However, political uncertainty will be a factor in 2017

• The UK government invoked Article 50 of the Treaty of Lisbon, making Brexit irrevocable. The UK has two years to come to an agreement on withdrawal terms, which is not much time. The complete lack of visibility over future relations with the EU and the difficult negotiations that are to come will ultimately have an adverse effect on the economy, but most likely not before 2018. For now, growth is holding up.
• Private investment and consumer spending will feel the effect of rising inflation from the depreciation of the pound and the uncertainty surrounding future prospects. A moderately expansionary fiscal stance will be adopted in 2017-2018 (compared to the two previous years), and the government has some leeway to loosen its policy if needed.

• Shock of uncertainty related to the Brexit
• Public and foreign deficits still very high

China: a stabilising impact on the global economy and currencies in 2017 and likely in 2018 as well

• We believe China’s economic stabilisation will continue throughout 2017 and into 2018.
• The reasons for China’s economic stabilisation are both bottom-up and top-down. Both private capital expenditure and public spending are experiencing expansion cycles, and are proving to be much bigger than the market had anticipated.
• The longer-than-expected stabilisation of China’s economy (2016 to 2018) is giving rise to a global upturn, clearly benefitting global cyclical sectors, commodities and the emerging markets

The recovery is continuing, with growth above potential.

• The economy is showing signs of acceleration in terms of domestic demand (investment). Unemployment is at a 20-year low, wages (part time) are rising and profits are improving. The fiscal stimulus plan and the tax cut on corporate earnings are major supporting factors. Externally, the stabilisation in China is having a positive effect.