The economy leaves 2016 in better shape than when it entered 2016

In the United States, growth was at 3% late summer 2016. Household and business confidence is high as they wait for Donald Trump to implement his electoral promises of lower taxes and higher infrastructure spending. Late 2016 perspectives also improved in the Euro zone thanks to the lowering of the Euro and less pressure on national budgets. The Brexit vote and the ‘no’ of the Italian referendum have not induced any destabilisation so far. However, France’s weak performance limits her growth to 1.3% for 2016 (according to BIPE). Nevertheless, confidence is perking and should continue to do so early 2017.

Producers of petrol and raw materials see their economy improve as the price of these commodities rise. Even though Russia and Brazil’s recession is likely to last during 2017, these countries should be back on the growth track by 2018. However the Chinese economy continues to slow down, as it suffers from capital flight and a raise of tensions with the United States.

Market activity in 2016 was dominated by petrol price increase, the US dollar appreciation (heightened by the disconnection of the monetary policies of Japan, Europe and the United States) and the downturn of bonds yields (bonds of 10 year maturity hovered around 0%). However, the Federal Reserve in the United State raised its interest rates this summer as it anticipated inflationary pressure. The pound sterling downfall, in reaction to the Brexit vote, also exerts inflationary pressure.

Unemployment is finally receding. International economic institutes are encouraging national States to sustain their economies by easing up on budgetary constraints and even by applying pro-cyclical measures.

Therefore BIPE believes that prospects are much better for 2017. However, many issues throw uncertainly on the economic conjecture:

  • At the eve of Donald Trump’s victory, it is hard to estimate the amplitude and impact of his economic measures. Will these measures induce inflation? Will Donald Trump have to break the promises he made to his electors?
  • The US dollar appreciation will strain the US debt. This could make the United States implement protectionist measures. Furthermore all countries and firms with debts under this currency will find themselves fragilised.
  • Europe will hold several elections this year, and there is a risk that anti-European and anti-immigration parties will win many seats.
  • The current rise of petrol prices could be capped as countries, who did not sign the global agreement to reduce petrol production, raise their production levels.

Notwithstanding, BIPE believes that economic prospects should improve for 2017. But two risks cloud our horizon: uncontrolled inflation and international and national political shocks.

Valérie Plagnol, Chief Economist, 09/01/2017

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Publié le: 09-01-2017