Economic e-News - December 2016

By Craig Turnbull
Chief Investment Officer


What will President Trump mean for the global economy?

The result of the November US election came as a shock to many but the reality is now sinking in and market analysts are mulling over what a Trump presidency will mean for the global economy.

Here in Australia, the ASX fell sharply as the election results rolled in but bounced back strongly and continued in a general upward trend for the remainder of the month, finishing November on 5,441 points.

enews aug graph

Source: Yahoo Finance

What are the risks for the world economy?

It is difficult to predict what a Trump presidency will mean for the world economy as it is still too early to separate tangible policies from some of the extreme campaign rhetoric.

However, it is Trump’s statements on trade that have caused the main concern.

Trump’s plans to withdraw from the Trans-Pacific Partnership trade agreement and to renegotiate the North American Free Trade Agreement would be a major blow to the liberalisation of world trade.

There are also fears that the threat to impose tariffs of up to 45% on goods imported into the US from China and Mexico may spark a trade war, further weakening global economic growth.

However, many commentators argue that Trump may need to adopt a more mainstream policy position on trade if he is to successfully get his legislation through the US Congress.

And to maintain the confidence of the markets, he may need to temper a number of his populist policies with a degree of economic and political pragmatism.

And what are some of the possible benefits?

The US economy is already showing strong signs of recovery with healthy corporate profits and consumer spending contributing to an annual GDP growth rate of 3.2% in the September quarter.

Nevertheless, during the campaign, Trump announced a number of fiscal promises designed to stimulate long-term growth in the US economy.

Trump promised to slash personal income tax as well as reduce the number of tax brackets from seven to three. He also announced plans to drop the business tax rate from 35% to just 15%.

Most commentators concede that these tax cuts have the potential to fuel US growth by boosting business investment and consumer spending, and this would also have a positive flow-on effect for global economic growth.

Trump's pledge to invest $1 trillion in upgrading US roads, rail and ports over the next ten years is also likely to have a significant impact on the US economy.

And more construction means a need for more commodities, such as iron ore, and that’s good news for our exports and the broader Australian economy.

However, these tax and spending promises would further inflate the US budget deficit, particularly in the short to medium term, and this may pose some real political challenges for President Trump.

What does this mean for investors?

The mood of global markets is more positive than it has been for some time and this has come as a welcome relief for many investors.

Trump’s promises of tax cuts and higher spending have helped to lift the US share market, with the Dow Jones and the S&P 500 reaching record highs in recent weeks.

So hopefully with some cautious optimism in the air, we can all relax and enjoy the festive season this year.

Have a great Christmas!

 

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Markets at a glance

for the month ending 30 November 2016

upArrow Australian sharesup by 2.99%
downArrow Australian Government Bonds yield2 up to 2.670%
upArrow Australian dollar down to US$0.7474
noArrow Cash ratesteady at 1.5%
upArrow International shares up by 1.30%

 

1 ASX 200 Accumulation Index
2 Yield on 10 year Australian Government Bonds
3 RBA cash rate
4 MSCI – World ex Australia (USD)

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