The new Trump administration’s first steps in the United States, upcoming elections in France and Germany… 2017 looks like being a particularly uncertain year. What could the consequences be for developed and emerging economies? Olivier Garnier, Societe Generale’s Chief Economist, answers our questions.
This new year is seeing a lot of uncertainty. One area of doubt concerns the United States and the impact of the economic policy that Donald Trump would like to implement. Do you have any more visibility in this regard?
The economic measures that will effectively be put in place by the new US administration are indeed still unclear. However, we can expect initiatives in a certain number of directions: a more accommodating budgetary policy in the form of tax cuts, an in-depth overhaul of corporate taxation, deregulation measures – in the financial sector for example – and measures aimed at limiting foreign imports and immigration.
All in all, this policy should stimulate demand, but its impact on offer is more unclear, with some of its components having a positive effect (deregulation, incitement to invest) and others a negative effect (restrictions on imports and immigration). It could therefore stimulate American growth through to 2018, but with a subsequent backlash given that the US economy is already close to full employment with a jobless rate that has today already fallen below 5%.
This more expansive budgetary policy should lead the Fed to increase interest rates at a slightly quicker pace, albeit only gradually with rates remaining below or close to zero in real terms in 2017-2018.
Regarding emerging economies, will they become more dynamic again?
Emerging economies are currently benefiting from the upturn in commodities prices and the stabilisation of Chinese demand, at a time when developed nations are also seeing their economies strengthen a little. This context should lead to a cyclical upturn, boosted by an upturn in the flow of capital. However, this upturn is likely to remain limited, particularly in Brazil and Russia following the deep recessions that have affected their growth potential.
There are numerous risks in this scenario, with the possibility of a more brutal than expected slowdown in China, an increase in geopolitical tensions (Middle East, Ukraine, South China Sea, etc.) or a faster-than-expected tightening of monetary conditions in the United States that would directly affect emerging economies that have debt in American dollars. The adoption of protectionist measures in the United States would also be liable to weigh on the upturn in global trade. Furthermore, on top of Brexit negotiations, Europe is also a source of uncertainty, given the numerous elections that are coming up in key countries where populist or eurosceptic movements are gaining ground.
This uncertainty is notably weighing on French government bonds, whose spread with Germany has significantly widened recently…
It is no secret that the markets dislike uncertainty, which explains their reaction, notably regarding French public debt, in recent weeks. They can also amplify phenomena or overreact. Either way, it is currently difficult to interpret opinion polls and even more difficult to know how these polls may evolve between now and the French elections. We therefore need to be ready to cope with further increases in pressure over the coming period.
Having said that, it should be noted that this pressure has remained concentrated on the public debt market, and has not affected corporate financing. Moreover, the private debt market is faring well in the euro zone, particularly for French issuers. Furthermore, the French stock market has rallied almost 10% since November’s US elections, i.e. a similar performance to the index representing the euro zone as a whole.