As far as the global economy is concerned, 2017 will be the year when new US President Donald Trump will make his mark. That said, how far his influence will reach is still uncertain as it is still too soon to know how many of his policies will be implemented.
Trump’s victory has caused uncertainty because of his unpredictable character and his populist and nationalistic proposals. It’s difficult to know how many of these will come to fruition, but it’s worth bearing in mind that the US has some political counterweights. So it’s to be hoped that, in the end, his political agenda will be toned down with respect to his electoral proposals.
Although it’s true that Trump has presented a worrying package of measures for his first 100 days in office, some of the proposals which attracted the most attention during the campaign period have lost their protagonism. Meanwhile, others like those related to infrastructure investment lack details. So, for the time being, uncertainty reigns.
In general, Trump’s measures point to a short-term boost in US domestic demand, with a change in the combination of economic policies with fiscal expansion and a less expansionary monetary policy, which will lead to higher interest rates and a stronger dollar; a negative shock for supply in the medium-term, where trade restrictions and less immigration will offset the possible impact of deregulation and infrastructure spending.
At a global level Trump’s proposals, as a whole, will make for a challenging environment. And, in particular, they will not benefit his southern neighbours. Although given Latin America’s strength, it is better prepared to face up to the difficulties and evaluate more favourable alternatives. While the extent of the change is still being defined, it’s difficult to evaluate the consequences and the responses from the region in terms of economic policies. As far as the likely impact for China goes, a strong dollar and possible US trade restrictions which would influence financial stability and the price of raw materials, the consequences seem undeniable.
From what the President-elect has announced, we are led to understand there will be a slightly bigger rise in US GDP. This is a positive factor, but it could be neutralised by the adverse effect weaker exchange rates would have on expectations, as well as less expansionary monetary policies than predicted up to now and a delay in investment projects.
In the event of Trump revising existing trade agreements, as announced, there is certainly a potential impact. Although it’s worth considering the extent of this risk. On the one hand, raw materials are still the nucleus of the exports from the region and it doesn’t make much sense to impose restrictions on these type of products; trade with China and to a lesser extent with Europe and what takes place within the region, accounts for over 80% of the total. Furthermore, in the case of Mexico, which is clearly more exposed to the US, it’s been a long time since their trade has been just an exchange of finished goods. Both countries are integrated in mutually dependent value chains which are very difficult to replace without damaging US companies themselves.
And finally, there are the actions linked to the change in the combination of economic policies which historically has not been good for Latin America. But there are some nuances here. On the one hand, the flows of capital to the region in the last few years have not been driven by growth expectations, but by a favourable return-risk combination. This has been the result of solid external accounts and high real interest rates, in relation to those in developed countries. On the other hand, the capital flows to the region are now much more diverse (direct investment, long-term debt) than some decades ago when short-term credit played a key role.
The credibility of Trump’s fiscal policy will be a determining factor for the dollar, while the changes in the monetary policy committeee will be so for the Fed. And we should not lose sight of the fact that Yellen ends her mandate in February 2018.
Political uncertainty hovers over the Eurozone
As far as the Eurozone is concerned, the main uncertainties come from the political environment, not only in relation to possible change in US foreign and trade policy but also to the electoral processes in various countries in in the euro area. The recent constitutional referendum in Italy and the repeat of the second round of presidential elections in Austria are a reference here.
According to the most trustworthy estimates, eurozone GDP grew 0.3% in the third quarter of 2016 and 1.6% year-on-year, in line with the previous quarter, but with greater bias towards domestic demand. The recovery in the emerging economies should improve the external sector’s contribution, but the political uncertainties could prove a disincentive for investment decisions.
Accelerated domestic demand growth in the third quarter has been based on private consumption and construction investment, while there has been stable growth in investment in capital goods, which has compensated for the weakness in exports. For the fourth quarter, the indicators showed an increase in October, which points to accelerated economic activity driven by the fast rise in economic growth in the US and the UK’s resistance to the Brexit factor.
With regard to inflation, this rose 0.5% year-on-year in October, leaving behind the negative rates registered in the second quarter of the year, due to the increase in energy prices. That said, this effect has not been passed on to underlying inflation which remains stable at around 0.7% year-on-year. Inflation expectations have increased to some extent (because of oil prices and the new prospects for fiscal policy in the US), but they are still far off the ECB’s target (2%).
And finally, the ECB’s survey of bank lending reveals that its monetary policy has contributed to the relaxation of financial conditions in the Eurozone. In the third quarter, the banks eased up on their requirements for granting loans. But where the ECB’s policy has been most noticeable is in the expansion in corporate debt issues. Credit demand is also increasing, although it is going hand in hand with the deleveraging still happening in the private sector in various countries. This is translating into a slow acceleration in credit to the private sector (1.9% year-on-year in October compared to 1% at the start of the year).
Expansionary fiscal policy as an ensign
Against a backdrop of a more normal political outlook, the Spanish economy is expanding at an intense pace. In the third quarter, GDP grew 0.7% quarter-on-quarter and 3.2% from a year earlier, a minimal slowdown from the previous quarter and double the average growth registered in the euro area. Household consumption and investment in equipment are the main growth drivers, helped along by the good performance from exports. Public sector spending is more moderate – above all in investment – but there is a positive fiscal impact via the cut in taxes in the private sector.
With regard to the labour market, this is also in an expansionary cycle, with jobs being created in all economic sectors. The number of people in work in the third quarter of the year rose 0.8%, which implies 140,000 in work in the period and 479,000 in the last 12 months. The unemployment rate (18.9%) is still going down, supported by job creation as well as a certain decline in the active population. Given all that, it’s not very satisfactory that there is still a bias towards temporary employment (the temporary employment rate is now at 27%, the highest since 2008). So this could be an area for reforms in the future.
Inflation is registering positive rates (0.7% year-on-year in October) now that the impact of the decline in oil prices has disappeared. That said, underlying CPI is still very low (0.8% year-on-year in September). This is the result of a lack of pressure on the costs side. Wage increases per worker were only 0.1% year-on-year in the second quarter, below the agreed salary rise (1.1% up to September).
The public deficit target for this year is 4.6% of GDP (compared with 5.1% in 2015), a figure which is attainable in light of the budget execution up to July and after the measures taken by the government. However, it’s not a very demanding target given that, on the one hand, we need to remember that the deficit target at the start of this year was 2.8% of GDP. And on the other hand, it implies a 0.5 percentage points (pp) correction of GDP, when only the cyclical deficit has fallen 1.2 pp. This means that the fiscal policy is expansionary, with an impact on GDP growth which we estimate is around 0.6 pp.
The final thing to take into account is that credit to the private sector remains weak and its balance fell 4.9% in the third quarter from a year earlier (compared with 4.2% at end-2015). However the base trend is a bit more positive than it appears at first glance, since the accelerated drop seen between the fourth quarter of 2015 and the second quarter of 2016 has been exclusively due to credit to financial companies (investment funds, pension funds etc). The rest of the segments (non-financial companies and households) are still recovering, although a bit less in the third quarter of 2016, something which was already apparent in new operations. As the bank lending survey shows, over the year as a whole the lenders have seen a fall in the demand for credit in the segment of non-financial companies, which continue to build up a financial cushion via corporate debt issuances, as well as in mortgage loans. Only consumer credit has increased its balance (10.3% in the third quarter of 2016).