President Barack H. Obama is presiding over his final week in the Oval Office. Come Friday, 20 January 2017, Donald J. Trump will be sworn in as the 58th commander-in-chief of the United States of America. This is a major political event, and one that will have far-reaching economic implications. For starters, the US has shifted from left to right, and a firestorm of economic and political changes are expected.
President-elect Trump has made it a priority to usher in an era of America First. This includes massive investment spending to upgrade roads, highways, schools, inner cities, ports, airports, and the like. The 58th Presidential Inauguration marks the peaceful transition of power from one administration to another. Already, we have seen significant upside momentum after Trump was elected. Wall Street is rallying towards record highs, with the Dow Jones hovering around the elusive 20,000 level. Both the Nasdaq composite index and the S&P 500 index are gaining ground under Trump.
US Indices Rallying Ahead of Inauguration
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With momentum building, President-elect Trump was quick to point out a replacement plan for the highly contentious Obamacare. His team is set to reveal details of the plan in coming days, as he prepares to start signing executive orders from day one. Trump has generated immense enthusiasm from the financial sector, small business, and those in favour of draining the proverbial swamp of Washington insiders and special interests. The US remains highly divided, and significant opposition to Trump’s election is still making its rounds.
However, on an economic level things couldn’t be better. The US dollar is trading around 14-year highs, and the DXY (US dollar index) is up 0.36%, or 0.36 points at 101.53. The 52-week high of this accepted measure of US dollar strength is 103.81. Clearly, the bulls are charging for the greenback, and this momentum is going to continue throughout the week. Over the past 1 month, the Dow is up 0.21%, the S&P 500 is up 0.73% and the Nasdaq is up 2.52%. Traders can expect these trends to continue this week.
IMF Forecasts 3.4% Global Economic Growth with Trump in Office and China on the Mend
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US Exports as % of GDP
The International Monetary Fund (IMF) released its latest forecasts for global economic growth, and a figure of 3.4% is now expected. IMF forecasts are largely the result of Trump being elected and increased growth prospects in China. In 2016, global growth took place at 3.1%, the worst performance since the global financial crisis hit in 2008. Global growth projections for 2018 are unchanged at 3.6%. The IMF believes that Trump’s fiscal stimulus plans will provide the impetus needed to kickstart the world’s #1 economy. More importantly, Republicans now control the executive and the legislative branches of government in both the House and the Senate. These majorities will allow Trump to pass legislation easily, except in the Senate where a Democratic filibuster is possible.
Will a Strong USD Hurt GDP Growth in the US?
The IMF has forecast an economic growth rate of 2.3% for the current year in the US and 2.5% in 2018. These projections are significantly higher than the pre-election guidance. There are some concerns about the imposition of tariffs on countries like Mexico and China, and the negative impact that such measures would have on the US economy. The threat of a trade war with China remains ever present, but that is a long-term concern that will not affect short-term trading decisions. Presently, traders will be encouraged by dollar strength and call options on major currency pairs are the order of the day. Unfortunately, a strong USD has a negative effect on export growth in the US. On the plus side, exports account for a marginal percentage of US GDP. Data provided by the World Bank indicates that exports account for 12.6% of GDP.
* Exports comprise 53.1% of Austria’s GDP, 82.9% of Belgium’s GDP, 53.4% of Denmark’s GDP, 22.1% of China’s GDP, and 27.2% of the United Kingdom’s GDP.
Which Countries ‘GDP Are Expected to Grow the Most in 2017?
Leading the charge is India, followed by China and developing countries. Developed countries such as the US, Germany, France, Italy, Spain, Japan and the UK are expected to grow at less than 2.4%. The US economy is now approaching full employment and maximum capacity. If the fiscal expenditure takes place, the US could find itself in an inflationary environment and the Fed will be required to act to rein in runaway price rises. By raising interest rates, more money will be taken out of circulation as it will be deposited at banks and financial institutions. This will have the effect of tempering inflation.
For now, the Fed is expecting at least 3 rate hikes in 2017, but much of that policy will be determined by fiscal policy measures adopted by the Trump administration. There are some concerns to look out for in 2017, including German elections, elections in France and the vaunted UK Brexit. Despite China’s rampant economic growth, the overall momentum is cooling. In 2018, the IMF is expecting China’s economic growth to decline to around 6%. Back in the US, investors will want to keep a close eye on the Fed’s inflation target rate of 2% and Trump’s economic growth forecast of 3% – 4%. Trump’s 3-pronged approach to kick starting the US economy involves cutting taxes, repatriating trillions of dollars from abroad, and massive fiscal stimulus.
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