Aside from the myriad of factors which could cause 2017 to be yet another false start, we see the potential for three positive surprises.
- Fiscal stimulus. After a prolonged period of fiscal austerity, President-elect Trump intends to deliver large corporate and personal income tax cuts and more public spending. Similarly, the UK Treasury’s post-Brexit mini-Budget abandoned the target of budget surplus by FY2020 and instead envisages £122b of borrowing over the next five years. The diminishing effectiveness of monetary policy means the shift to fiscal stimulus is welcomed—and will drive near term growth—but higher interest rates and a stronger USD may partly offset the boost. And caution stems from the a) scope and composition of stimulus, which may not deliver the highest fiscal multipliers, and b) potential damage to long term fiscal sustainability—US public debt already exceeds 100% of GDP.
- Stabilising commodity prices. Although current spot prices are unlikely to be sustained, the worst looks over for commodity producers. The RBA forecasts the terms of trade to remain above the levels reached in early 2016—stabilising around 25% above the average of the early 2000s before the boom. This has been driven in particular by an improved outlook for coal prices, driven by China’s demand and production cuts. OPEC production cuts have also buoyed oil prices, but the scale and longevity of the respite may be limited by 1) the potential for non-compliance, 2) a large inventory overhang and 3) new technologies which have lowered the breakeven costs of US shale production. While higher prices will ease pressure on large commodity producers, recoveries may be weak and fragile—particularly in the Middle East, Russia and Nigeria.
- Reforms in Asia economies. Reform-minded governments could continue to improve growth momentum and business conditions in India and Indonesia.