Although 2016 has been a disappointing year overall, global n growth is nowaccelerating to the top of the 3%-3?% range that has prevailed throughout thepast five years. The main reason is the swing in the financial conditions impulsefrom sharply negative to modestly positive, both in the US and in parts of theemerging world.
US President-elect Donald Trump and the Republican-led Congress are likely topass a fiscal stimulus package, which could provide a further temporary growthboost starting in mid-2017. However, aggressive implementation of Trump’s tradeand immigration policies would likely weigh on growth.
While Trump’s proposed policies have ambiguous effects on growth, they arelikely to reinforce the gradual upward move in inflation that is already underway,as output and employment are now close to potential. Moreover, we remainskeptical that the equilibrium interest rate has fallen as much as widely believed.
We therefore still expect the Federal Reserve to raise the funds rate substantiallymore than implied by market pricing.
Tighter Fed policy is likely to put further upward pressure on global long-termrates. Faced with significant slack and low core inflation, the ECB will try toinsulate itself from the resulting tightening in financial conditions with anextension of its asset purchase program. The BoJ meanwhile will focus on theimplementation of its yield control policy. Greater interest rate divergence shouldput continued upward pressure on the dollar.
The risks to our baseline forecast are skewed to the downside. First, muchremains unclear about the economic policies of the incoming Trumpadministration, and the positive initial market reaction could reverse if the policymix looks more unfavorable than now widely assumed. Second, Europe could reemergeas a source of political risk, with the French election at the top of the listof concerns. Third, a stronger dollar could lead to renewed pressure on emergingmarkets, especially China.
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