Posted by Oliver Meredew on April 27th, 2017.
With Donald Trump surviving his first 100 days as US President and the UK starting the formal process for leaving the EU, 2017 has already been an action-packed year – but have the last few months been the calm before the storm?
Economists have been quick to make economic forecasts for 2017, so we’ll be taking a look at some of the predictions for what the rest of the year has in store.
Sticking close to home, we’ll peer into the crystal ball to see what the experts think about the remaining key European economic events of 2017.
Kicking off predictions is Fortune, which highlights a possible Italian separation from the Eurozone as causing significant damage to the currency bloc. Quoted in Fortune, High Frequency Economics Chief Economist Carl Weinberg argues;
‘If Italy moves out of the Eurozone and away from the European Union, the economic and financial implications will throw European economies into recession’.
Discontent among EU among member states has been a key part of Goldman Sachs Chief European Economist Huw Pill’s predictions for the rest of the year;
‘We will see elections in Germany and France in 2017 and given the opinion polls which point to [a] strong performance by populist and Eurosceptic parties, the danger that the pro-European equilibrium could be disturbed is one that has the potential to change the market. [However], those populist parties probably still have some way to go to achieve meaningful power’.
If the current French Presidential election sees Emmanuel Macron take office, current fears of a European separation will likely be put to rest, at least until the later German Federal election.
Pill expects the Eurozone to grow at ‘1.5%’ in 2017, for unemployment to fall and for reduced pressure from inflation. This sentiment has been echoed by a key Eurozone figure, European Central Bank (ECB) President Mario Draghi.
The key test for the Eurozone this year will be integrity – if the European ‘project’ remains in good health despite election trials and Euroscepticism, then the EU and Euro will live to fight another day. If divisionism and weariness of the European ideal take hold, however, then economic turbulence could ripple across the continent.
Of course, in the wake of UK PM Theresa May’s unexpected announcement in April we now also have a UK snap election to contend with.
If the election results in a landslide victory for the Conservatives, which is currently being forecast, it could improve May’s negotiating position in Brexit discussions with the EU – potentially leading to an improved economic outlook for the UK.
Moving further afield, a nation already making waves in 2017 has been China.
The Chinese government is increasingly looking to reassert China’s status on the global stage. This is already helped (or hindered) by the sheer size of the Chinese economy, which has an active effect on global economies and currency markets.
All is not rosy in the People’s Republic of China (PRC), however; officials have national growth as a high priority, which has been complicated by pressure to change from heavy industry to more sustainable activities.
The US also threatens China, with the ‘America First’ policies of President Trump coming at odds with the open trade outlook of Chinese President Xi Jinping.
Trump and Jinping historically met in early April. While talks seemed to go smoothly, afterwards both sides soon returned to their détente over key matters like trade and North Korea.
Former Fortune reporter Chris Matthews has highlighted the difficulties faced by China;
‘China’s government is aiming 6.5% growth over the next five years, but recent experience has shown that reaching these goals will not lead to a stable Chinese economy unless targets are hit [sustainably]’.
Matthews believes that if the Chinese economy became more orientated on consumer spending it would help counter this current economic predicament.
Offering another outlook on the Chinese economy in 2017 has been Goldman Sachs Chief Asia Pacific Economist Andrew Tilton;
‘We expect China to continue its bumpy deceleration but ultimately to hit the official growth target of 6.5%. We think the central government will place a very high priority on achieving that growth target’.
As with the US, Tilton estimates that the Chinese government will be pushing for higher spending on infrastructure this year, making high national debt a distinct possibility. President Xi has been in office since 2013, but 2017 could prove a key test of his diplomatic nous when it comes to bargaining with fellow world leader Donald Trump.
Rounding off our global outlook, we turn to China’s long-time rival and another global superpower, the United States.
The US has a new President at the reins, former businessman and real estate mogul Donald Trump. Trump has made a strong first impression in the US, signing off a flurry of executive orders and sparking controversies in rapid succession.
With the world still coming to terms with such a divisive figure, the US economy could be in for some dramatic shocks as Trump tries to push through plans like a US-Mexico border wall, for one.
On the homefront, the Federal Reserve (the US central bank) has been a hot topic among economists; the Fed has already started raising interest rates this year and is expected to raise rates further in the months ahead. Higher interest rates in the US have a knock on effect, and typically push the US Dollar higher at the expense of higher risk currencies like the Australian and New Zealand Dollars.
Fortune estimates for the Fed;
‘Chair Janet Yellen may be forced to move faster if generous fiscal spending overheats the labour market and leads to inflation significantly above the central bank’s 2% annual target’.
Goldman Sachs Chief Economist Jan Hatzius also expects US inflation to hit the Fed’s target;
‘Since we’re starting from an unemployment rate at our estimate of [maximum] potential, it’s probably going to mean a modest amount of labour market overheating. That means some upward pressure on inflation…we think we’ll probably reach the [Federal Reserve] target [of 2%] by the end of 2017.’
This equates to further US Dollar-boosting interest rate hikes in 2017, which could pressurise sectors like housing and financing if wages don’t increase in parallel.
Trade has been another major US issue. On the one hand, the prospect of ‘Trump trade’ has attracted Fortune;
‘All eyes will be on Trump as he sets the tone for global trade. Will he…set his sights on reshaping trade with China, possibly running afoul of World Trade Organization rules? Trump may even play a role in the Eurozone, as he has [been willing] to quickly negotiate a trade deal with Britain, making the option of leaving the EU more enticing for [member] states’.
On the other, Fitch’s outlook is dominated by fears of US-Chinese trading conflict;
‘In the event of the US imposing punitive trade restrictions on China, retaliatory actions could see a trade or currency war develop. This would be highly damaging for global market sentiment and would reduce world growth’.
Recent developments have seen Trump risk burning his bridges with Canada by slapping a tariff on Canadian imports. This situation bears close scrutiny, due to the potential for a tit-for-tat trade war breaking out.
Closing off the US outlook for 2017, World Bank has offered a pointed view on how US economic policies could influence the world in 2017;
‘Economic policy initiatives in the United States can have sizable ripple effects around the world – a testament to the US’s size and global integration. Continuing uncertainty about the direction of US policies in itself could influence global growth prospects. The incoming administration promises major changes in key areas, including fiscal policy and international trade’.
Essentially, uncertainty is bad for world trade, and the Trump administration may be creating instability by the bucketload over the course of the year.
That rounds off our rundown of major EU, Chinese and US developments to be aware of over the rest of 2017. Currency volatility is only set to continue as the year continues, so keep an eye on the TorFX currency blog for any major developments that could have an impact on your international money transfers.
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