Developments in the United States tend to drive global markets. We expect this to hold firm in 2017. This year I expect Trump will bring growth to America, but instability to global markets and trade.
Donald Trump’s two key business appointments are aggressively pro-business. Treasury secretary Steven Mnuchin and commerce secretary Wilbur Ross both come from investment banking backgrounds. Analysts expect them to introduce an array of market-friendly policies, including tax cuts.
In the US we expect growth to accelerate beyond the 1.6 per cent seen in the last year – this wasn’t much better than European growth and was actually behind the UK’s. We expect the dollar to continue to strengthen against a wide range of currencies. We also expect higher US inflation, driven in part by a rising dollar and possibly fired on by rising barriers to imports. We also expect wages to increase even faster than inflation.
A lot of these factors are already in play before Donald Trump, and will be accelerated by the changes we expect the new administration to implement in 2017.
The relationship between the US and the rest of the world, however, looks decidedly uncertain.
In particular, the dynamic between the US and China and other developing economies looks set for big changes under Trump. Before even reaching the presidency, Trump has begun to erode the long-standing One China policy, a cornerstone of Sino-American relations since Nixon. The President-Elect appears eager for the US to take a step back from free trade, making hostile noises about major trade deals including the Trans-Pacific Partnership, but the exact nature of such a move and its consequences remain unclear. These are potentially enormous changes and could have a significant impact on global growth and security.
In Europe, there are also many political risks that threaten global stability independently of Trump. Turmoil in Italy is not yet over – a general election is likely this year. Financial markets will be unsettled if we see growing support for the populist Five Star Movement, a party that aims for Italy to leave the euro.
Europe narrowly escaped a further setback when Austria chose not to elect a far-right candidate in December but, especially after the attack in Berlin, there is little room for complacency about the electoral threat posed by anti-immigration, anti-EU parties of Europe’s right and extreme right.
On this note, both France and Germany face elections in 2017. France’s Front National and Germany’s Alternative fur Deutschland are parties of protest turned realistic contenders for power. The example of Brexit and the rise of Eurosceptic parties in both countries raises genuine questions about the stability of the Eurozone. The risk of it all unravelling is no longer zero.
In Britain, we expect the government to trigger Article 50 in the spring – either with a parliamentary mandate, or independently of Parliament if the Supreme Court allows. If the Supreme Court forces the government to table a Brexit bill, a showdown in Parliament could be on the cards – MPs might demand oversight of the Brexit process which the government would oppose. While we don’t expect any detailed picture of the UK’s future relationship with Europe to emerge during 2017, the continued uncertainty could very well dampen UK growth.
There is therefore a great deal of uncertainty ahead. It will be felt most acutely outside of the United States. America, you could say, looks set to export its instability to a world that could do without it.