The US could be one of the few major economies to see growth accelerate in 2018. The US tax reforms voted in at the end of 2017 are not only considerable but will also profoundly revamp the US tax system. They will encourage US companies to invest in productive capacities but make borrowing more expensive. We estimate that large and small companies together will enjoy $11bn in tax cuts. Consequently, corporate investment should accelerate further after rising 4.7% in 2017 on the back of a recovery in the energy sector. Households would fare less well as lower income tax is to be partially offset by the end of certain tax deductions. Net tax cuts should only amount to $17bn in 2018, or not enough to offset inflation which could hit 3% in July if oil prices were to stabilise at May 2018 levels of $70 a barrel.
As a result, US growth would accelerate to 3% on average in 2018 but our expectations of soft consumer spending and no change in labour availability should prevent this fuelling excessively high inflationary tensions. Note that compared to the beginning of the 2000s, 3.2 million Americans are still unemployed -and therefore available for work- and the number of hours worked per week is still one hour less. The Fed should therefore continue to raise rates gradually so as to prevent a growth driver like consumption stalling in a period of US dollar appreciation.
Any acceleration in US growth alone could prove disruptive
Any acceleration in US import growth would automatically exacerbate the already acute tensions between the US and China. That, in turn, would increase the risk premium and volatility, dampening investment in vulnerable areas like Europe and Latin America. Growth in the eurozone could slow due to weaker momentum in construction after 2 years of robust activity driven by a recovery in lending to the private sector, particularly in Germany and France.
Yet France has decided on macroprudential measures to curb lending. And exports are likely to struggle due to the euro’s appreciation - it gained 7.6% in 20171 against all other currencies - as well as higher US customs duties. The political risk premium has also risen to reflect political developments in Italy, Spain and Germany.
For all these reasons, we expect growth in the eurozone to slow from 2.5% in 2017 to 1.8% this year and 1.6% in 2019.
Any disruption caused by the global economy ceasing to enjoy synchronised growth would result in highly volatile interest rates. The seeds for a deterioration in global growth prospects are still in place.
1 Source BCE.
Group Chief Economist
This analysis is an extract from the first House View published by Edmond de Rothschild.
This publication presents Edmond de Rothschild’s key convictions for macroeconomics, asset allocation strategy, and the principal asset classes.
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