A return to American supremacy ?

Macroeconomic Forecasts - 6/11/2018

In short
  • US growth could accelerate to 3% on average in 2018
  • Eurozone growth is likely to slow to 1.8% in 2018 from 2.5% in 2017
  • Chinese-American trade tensions: the American objective is to increase trade rather than to reduce it
  • The improvement in the global environment stems from a general increase in debt

Dr. Mathilde Lemoine, Group Chief Economist at Edmond de Rothschild, in her latest bi-annual report entitled: "A return to American supremacy?” gives her new macroeconomic forecasts for 2018 and 2019.

Whereas growth accelerated globally in 2017, only the United States could again experience an increase in economic activity in 2018 and so once more become the leading player driving world growth. Donald Trump could win his wager and put the United States firmly back into the race.

Edmond de Rothschild distinguishes itself through its firm conviction that American tax reform and de-synchronization of world growth are likely to increase variations in interest rates and financial market instability.

The United States: very wide-ranging tax reforms

Not only is the US tax reform voted at the end of last year considerable in terms of its amount, but it is profoundly changing the US tax system. It aims to encourage American companies to invest in production resources while making borrowing more expensive. According to our predictions, net tax cuts could attain $111 billion and support business investment. On the other hand, the net reduction in taxes should be just 17 billion dollars in 2018 for American households. As a result, US growth could accelerate to 3% on average in 2018 without generating excessive inflationary pressures, given the anticipated lack of dynamism in consumption and the persistence of an available labour supply.

The Eurozone breakdown

Growth should decelerate to 1.8% in 2018 and 1.6% in 2019 after 2.5% in 2017 in line with the lesser growth of the construction industry and the previous appreciation of the Euro.

According to Mathilde Lemoine: “The political risk premium could rise again in 2018 and 2019 after reaching a low point following the election of the French President, Emmanuel Macron, because European institutional advances should remain at a standstill given the political situation in Italy, but also in Spain and Germany. Moreover, most of the proposals put forward by France, such as a budget for the Eurozone to consolidate the single currency has not found favour with Member States. Finally, the anticipated slowdown in growth could lead to a pause in the reduction of the average public debt of the Euro Zone which stood at 86.7% of GDP at the end of 2017 against 89% of GDP at the end of 2016”. “

In this context, the ECB will remain cautious and seek to avoid a rise in both short and long-term interest rates. It could intervene - as it has done on numerous occasions and as it has announced - to limit the rise in borrowing rates in Italy and the other southern countries of the Euro Zone. As for the political instability and Franco-German tensions that could result from increases in certain import duties by the United States, they could exert downward pressure on German government yields.

Persisting Chinese-American trade tensions

Threats and effective increases in import tariffs are more weapons of negotiation than the beginning of a protectionist war. Indeed, one of the main American demands is an increase in exports in order to reduce the trade deficit, compliance with intellectual property rights and the possibility of carrying on business in China without a Chinese partner to limit technology transfers. The American objective is therefore rather to increase trade than to reduce it. But US fiscal policy could lead to an increase in imports and thus an increasingly large trade deficit, which is likely to fuel tensions between the two giants.

Desynchronization of world growth: a new source of instability?

Mathilde Lemoine demonstrates that the improvement in the global environment stems from a general increase in debt Central Banks are continuing to intervene massively to manipulate asset prices and facilitate debt. This increases the risk of financial market instability. She warns against the de-synchronization of global growth, which is a source of major interest rate fluctuations.