Japan: Thank you Trump!

Alessia Berardi is a Senior Economist.

What is in store for the Japanese economy in 2017? We believe that sounder domestic fundamentals and support from a weaker yen should improve the Japanese outlook.

Looking back at 2016, two factors resulted in Japan ending the year in a better macroeconomic condition than expected at beginning of the year: strong support from the external side together with a significant revision of national accounts released with final Q3 2016 GDP. Continue reading

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Eurozone: Noisy Politics, Steady Economics

ThinkstockPhotos-185165281Andrea Brasili is a Senior Economist in charge of providing analysis on macroeconomic issues.

After Brexit and the US presidential election, a third ballot nightmare materialized in December when the Italian constitutional referendum ended in a wide defeat for Prime Minister Matteo Renzi’s government, with his resignation being the initial consequence. These episodes gave further voice to the centrifugal forces in Europe, and a success for the euro-skeptics in France would be particularly critical, as would a general election in Italy.

There are also a number of Euro or European-wide themes and issues: the issue of migrants is still a source of debate, as is the attitude towards the UK and the Brexit negotiations; the US position towards Russia and sanctions is also in focus, particularly if the Trump administration changes its posture towards Russia and NATO support. Continue reading

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3 Things the European Investment Grade Fixed Income Team Talked About Last Week

Brexit Direction Sign with sky as a background

1. Brexit – It’s Starting to Get Real

Late last week news broke that UK Prime Minister Theresa May will outline her Brexit strategy in a speech at Lancaster House in London on Tuesday January 17th. As generally happens in situations like this, government ministers and political spin-doctors begin to leak details of the strategy in the days beforehand, and this occasion has been no different. During the weekend, various Ministers and Advisors have been appearing on television and radio chat shows, giving hints as to what might be expected from the speech. It appears that PM May will signal she intends to pursue a “hard Brexit” strategy, intending to quit the EU’s single market for goods and services in return for two of her key demands – being able to control immigration and removing Britain from the jurisdiction of the European Court of Justice. Government sources have admitted that this news is likely to cause a “market reaction” – meaning they expected the UK currency to come under further downward pressure. Whilst publicly still maintaining that it will be possible to agree a trade deal with the EU within two years of triggering Article 50, privately many UK government ministers are admitting that there may be a need for a transitional deal to avoid tariffs being imposed when Brexit actually occurs. Over the weekend, a cross-party group of politicians who were tasked with advising on a Brexit strategy told the UK government in no uncertain terms that a formal white paper setting out the government’s priorities and plans should be published by the middle of February. Meanwhile the government is still awaiting the result of an appeal to the UK Supreme Court on whether the government needs to consult parliament before triggering Article 50. That verdict is expected sometime within the next two weeks. In an interview with a German newspaper, UK Minister for Finance Philip Hammond appeared to suggest that the UK was prepared to do whatever was necessary to regain competitiveness, even to the extent of slashing UK corporate tax rates in order to attract (or even maintain) investment in the economy. We have always maintained that the real effect of Brexit on the UK economy would only be apparent when the actual process of Brexit started, and it looks like that should start this week. We continue to believe that an underweight stance in UK government bonds is warranted against this backdrop.

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US Economy Accelerating in 2017

ThinkstockPhotos-538409537Andrea Brasili is a Senior Economist in charge of providing analysis on macroeconomic issues.

We believe that the current expansion phase in the US may continue, but unresolved issues remain in the long run. In fact, despite the very long growth cycle, we believe that expansion can last as signaled by the mid-cycle situation of the housing market and limited leverage of private operators. President-elect Donald Trump’s expected fiscal policy is likely to boost the economy in the short run, especially via corporate tax cuts, but the long-run impact might be harmful. There is a need to address long-term flaws, notably weak investment and productivity, and it is not clear if Trump’s policies will help in this regard. However, the positive impact of fiscal expansion is likely to be limited because the economy is already at full employment and the risk of overheating could increase the odds of a hawkish Fed in 2017.

Looking at the economic conditions in the US after a weak first half of 2016 (+1% annualized GDP growth), the US economy has been accelerating. With the labor market near full employment, new jobs have continued to grow by 180k per month and wages have started to rise. Growth is sustained mainly by consumer spending, thanks to disposable income gains and a steady increase in consumer confidence. Continue reading

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Growth and Inflation: A New Narrative?

Mighty percent of dollarsIn the second half of 2016, the growth premium favored Developed Markets (DMs) vs Emerging Markets (EMs) – with DMs regaining the macro momentum lost in the first part of 2016. We now expect DMs and EMs to display similar, moderately paced GDP growth going forward.

The US, Eurozone and Japanese economies have been accelerating while the UK has shown a certain degree of resiliency, so far, in the wake of the UK Referendum. At the same time, China’s growth is holding up well and the commodity space has steadied, allowing EM economies to maintain their overall momentum. Continue reading

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