Global Economic Perspective: December

US Election Result Moves Markets and Fed Raises Rates As Expected

The prospect of a Trump presidency has produced some sharp moves in global financial markets, as speculation about the introduction of a potentially sizable fiscal stimulus has caused investors to reassess their outlook for growth, inflation and interest rates in the United States. Upbeat economic data have fostered a positive backdrop, and investor confidence has been enhanced by the incoming administration’s orderly approach to the transition of the presidency. As expected, at its December meeting the Fed reacted to the improved data by raising interest rates, only the second such increase in a decade.

However, we feel some caution may be required before assuming that a more expansionary fiscal approach by the new administration will quickly translate into a sustainably higher growth rate for the US economy. While the US corporate sector could benefit from future tax cuts, it may suffer if other policies are introduced that restrict trade or immigration. In order to meaningfully improve the US trend growth rate from its post-financial crisis level of around 2%, comprehensive legislation—with a particular focus on improving the skills base of the US labor force to address low productivity—will probably be needed, and reaching the political consensus necessary to enact such measures could be extremely hard to achieve.

During November, an upward revision of third-quarter 2016 gross domestic product (GDP) was among the most eye-catching pieces of data, with growth marked up from 2.9% to 3.2%. The main factor driving the increase was consumer spending, which was estimated to have risen by 2.8% during the quarter, compared with a prior estimate of 2.1%. Given that the initial GDP reading had been heavily influenced by temporary factors such as soybean exports and inventory restocking, the higher contribution from US consumers was viewed positively as broadening the composition of growth.

Though October’s consumption spending data came in below consensus expectations, the buoyancy of consumers was underlined by The Conference Board’s survey for November, which showed consumer confidence at its highest level since July 2007. There were also early indications that holiday season retail sales had gotten off to a solid start, with some surveys suggesting increased demand for high-end items, as wealthier consumers anticipated tax cuts.