In the aftermath of Mr Trump’s victory, stock markets surged, building on promises of strong stimuli and sizeable tax breaks. As time goes on, they are reappraising the short-term outlook, since fundamental changes may take more than one year to materialise. No wonder investors are turning cautious, cashing in on early gains.
I hate this endless temptation for bracketing time into what we call “years.” Time is time and, by definition, there are no interruptions. The problems which beset us in 2016 are still here, whether it’s terrorism or open warfare or Spain’s ingovernability. Thinking it’s going to be very different in 2017 is deceiving ourselves.
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.
Those old jobs in productive manufacturing companies which exported from the developed countries to half the world are never coming back. You can’t suddenly use protectionism to reverse such a huge change which has taken place throughout the world.
There is a statistic link between profits and investment, in the US, so a drop in the former determines a recession in the following quarter. But the Trump effect is likely to mean another imminent recession will have to wait.
The markets are still discounting the inflationary impact of Trump’s measures. Furthermore, they are anticipating the positive effects of his fiscal policy, the best short-term guarantee of which is in economic agents’ shift in expectations. Our criticism of excessive complacency on these issues is well-known, although it’s true that the market doesn’t see it that way.
Someone like Donald Trump emerging on the world stage threatens to make too many changes in the status quo, some of which will have a particular impact on Europe’s economies and especially Spain. One area which appears likely to progress at a cruising speed in the short and medium-term is Defence spending. This is a particularly sensitive issue and one which Obama already tried to have modified during his mandate.
Since the beginning of 2014, the Spanish economy has been recovering from a very tough crisis – unemployment jumped from 8% in 2008 to 26% at the start of 2014 and has now fallen to 18.9%. This is in part thanks to the ECB’s extremely expansionary monetary policy and low interest rates. Now after Donald Trump’s victory, everything could become unstable.
Many take comfort from the prospect of higher inflation and rising interest rates driven by the fiscal stimulus the President-elect Trump promises to deliver. This will push the dollar up, endowing European exports with increased competitiveness. Yet the currency tailwind expectations might prove short lived as current debt levels curb any significant public deficit-led expansion.
AXA IM | Mexico, together with China, appears to be the country most exposed to Trump’s economic policy given its vicinity and close trade relations with the US. The Mexican peso has depreciated by 10% relative to its pre-election day closing level, the stock market is down 6% and the local currency sovereign 10-year rate has shot up by 112bps.