Yves Nosbusch




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Economic Outlook: All Eyes on the United States dotted

What are the key aspects of the new President's economic programme? First, it is important to remember that there remains a lot of uncertainty about the details of the programme. The market has quickly focused on the fiscal side where the intentions seem relatively clear. More specifically, early statements by the new president suggest a major fiscal stimulus with tax cuts for corporations as well as households. Moreover he intends to launch a large-scale infrastructure investment programme.


A large-scale fiscal stimulus should boost growth somewhat in the short and medium term. However its effects are likely to be limited by the fact that the US economy is already close to full employment (see graph). One would therefore expect a pickup in wages and inflation more generally.


United States: close to full employment

Taux de chômage 
Sources : Macrobond, BGL BNP Paribas


In addition, inflation was going to accelerate anyway because of the recent rise in the oil price. As a result of these various factors, the inflation rate in the United States should be close to 2.5% already in 2017.


Given that inflation is likely to pick up faster than what had been anticipated before the election, one would expect a quicker pace of tightening by the Federal Reserve. After one rate hike in December 2015 and another in December 2016, several rate hikes look likely in 2017 and in 2018. These rate hike expectations partly explain the significant rise in long-term interest rates since Mr. Trump's election.


The second key aspect of the new President's economic programme relates to international trade and protectionist measures more specifically. On this point it remains unclear what the extent of the measures will ultimately be. This is really the big question mark that hangs over current forecasts and these forecasts will have to be adapted as these matters are clarified over the coming months. However one thing that seems clear is that significant protectionist measures should drive up import prices and this would be an additional element that would contribute to the rise in inflation.


Inflation will also pick up in the euro zone as a result of the rise in the oil price but core inflation, which excludes food and energy prices, is likely to stay low for a while. At its December meeting the European Central Bank (ECB) announced that it would extend its asset purchase programme until the end of 2017 and possibly beyond, if required. So although the ECB is going to reduce the rate of monthly purchases from 80 to 60 billion euros starting in April, it clearly indicated that it would maintain its presence in the bond market for some time. At this stage, we do not expect major changes in ECB policy in 2017.


Yves Nosbusch

Chief Economist

BGL BNP Paribas

Publié sur paperjam.lu le 30 janvier 2017