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The global economy and markets enter 2017 on considerably firmer footing than last year. The outlook has improved for developed economies as growth momentum has picked up in recent months and risk assets across the board have continued the rally sparked by Trump's unexpected victory. But far more importantly, we believe that the election of Trump as the 45th President of the United States will fundamentally re-order the economic, financial and security arrangements of the post-WW2 era, and we believe that these changes will have a significant impact on the economic performance of nations, industries and corporates across the globe. The defining feature of Trump's economic approach is likely to be a rebalancing of the policy mix away from the exclusive reliance on easy monetary policy towards a more balanced reliance on deregulation of economic activity, supported by an expansionary fiscal policy as a means to jump-start the US economy. Incidentally, this is the same policy rebalancing that we and others have recommended for the eurozone for a number of years now. This policy will be successful in moving the US economy away from low-growth secular stagnation towards significantly more buoyant performance. We would not be taken by surprise by a doubling of the growth rate of real GDP in the US over the next two years, nor by a further significant move up of equity valuations and a material further appreciation of the dollar. The business background of many of the key members of President-elect Trump's new cabinet makes it highly likely that there will be a strong and concerted emphasis on lifting the heavy regulatory burdens imposed on the US business sector by the outgoing administration. We expect quick progress in reforming the corporate tax system and in rationalising the regulation of energy, finance, environment, healthcare, labour markets and the welfare system. These policies should help raise productivity enough to make higher growth rates sustainable in th [more]
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Trump’s win may have opened a new chapter for the US. The shift toward a more balanced mix of easy monetary and fiscal policy and looser regulation is expected to jumpstart the economy, ending years of low growth and inflation. Faster US growth would also have positive spillovers to the rest of the world. Risks remain that some of these growth-friendly policies are not implemented or have unexpected effects. But the biggest threat to growth is a possible protectionist turn, which would further depress already anaemic global trade. Any political spillover in Europe would also be negative. The first risk event is Italy’s Senate referendum on 4-December. Polls suggest the vote will fail, and if it does, PM Renzi will likely resign. The sell-off in Italian assets indicates that this outcome is being priced, but as long as immediate elections and a eurosceptic government are possible, market stress can build further. Elections in the Netherlands, France and Germany next year will ensure that political risk remains a source of volatility. In the coming weeks we will see the last ECB and Fed decisions of 2016. In Europe, taper talk is premature, and we expect a six month extension of QE. In the US, a rate hike in December is all but a done deal. Markets have so far focused on the positives of Trump’s policies, with the dollar strengthening, rates selling off and equities rising, reaching all-time highs in the US. Several of these trends should continue in the coming months: the rates sell-off has some further room to run and the dollar should strengthen further, with the euro reaching parity next year and further weakness expected in sterling and yen. David Folkerts-Landau, Group Chief Economist Key pages this month: P6 Reassessing global growth post US election P8 US growth upgraded P11 Deglobalisation risk P12 Italian political risk P16 Positive take from markets [more]
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The House View Special - US election: A potential game changer That the outcome of the US election was unexpected is an understatement. Few dared forecast a Trump victory, let alone a Republican sweep. Yet with Trump headed to the White House and the Republicans retaining control of both houses of Congress, the US has elected a unified government for the first time since 2008. Despite criticism of some of Trump’s policies, they could provide a material boost for growth and, in return, for risk assets, if they are implemented well. He has pledged a large fiscal stimulus, ambitious tax cuts and reduced regulation. The fiscal plan would represent the first tangible shift away from the policy mix that has prevailed since the crisis -- very accommodative monetary policy compensating for tight fiscal policy -- and that many investors have been hoping for over the last year. There is a risk that these policies will not be fully implemented, especially given that Trump’s fiscal plans could lead to a larger deficit than Congress will allow. This means that policy uncertainty will prevail for the time being. Moreover, not all of Trump’s proposals are positive. The biggest threat to growth is a possible protectionist turn, which could depress global trade and even trigger trade wars. A further risk is that Trump’s successes result in political spillovers to the upcoming elections in Europe by strengthening the fringes of the political spectrum. Markets have so far given this result the benefit of the doubt, embracing the potential boost to growth and inflation that could come from a shift in the policy mix. The extent to which this continues will depend on the policy signals from the next administration over the coming months. A Trump Presidency should be positive for the dollar and US equities and should allow for the continuation of yield curve steepening. You can access a two-page update of Deutsche Bank Research's views on global macro, monetary policy and markets, as [more]