U.S.: Surprise win for Trump, but Congress will provide balances

​U.S.:  Surprise win for Trump, but Congress will provide balances

In an upset victory which has widely been called “stunning”, Republican Donald Trump has been elected the 45th President of the United States and will be sworn into office on 20 January 2017. Having been viewed as a divisive candidate, reaction to his election worldwide has been intemperate. However, for virtually the first time since the start of the campaign, Trump struck a conciliatory tone in his victory speech, praising Clinton for her service to America and asking those who had opposed him for guidance and help. While Republicans maintained majorities in both the House and the Senate, Trump will still face significant hurdles implementing some of his proposals. Virtually all Democrats in Congress are likely to oppose him on many proposals, and a significant number of Republicans still disapprove of him and his ideas, potentially forming a voting block against him. The economic effects of his election will likely include an increased deficit due to stimulus measures of lower taxes and more spending, and a significant risk to growth from anti-trade policies. However the removal of uncertainty could spur consumer confidence and spending, and may give businesses the confidence to resume investment. The Fed is still most likely to hike in December.

Egypt:  The force awakens

Last week, the authorities delivered two long-awaited reforms (see also WERO 12 October 2016) and Egypt should now qualify for a three-year, USD12bn loan from the IMF. These reforms are: (i) The free floating of the exchange rate, ending a self-defeating defense of a peg to the USD (foreign exchange reserves fell to four months of import cover). The EGP depreciated by about -50% after the decision, and the premium over the black market exchange rate vanished immediately. (ii) Large cuts in price subsidies that sent the subsidized prices – which had heavily weighed on public finances in the past – substantially up (by +30% to +47%) to more normal levels. The Central Bank decided to hike its policy rate by +300bps to 15.25% in order to reduce the pass-through from depreciation to inflation. Nonethe¬less, Euler Hermes expects inflation to accelerate further from an average 13% in 2016 to 20% in 2017. This transitory shock will weigh on GDP growth, forecast at +2% in 2017, after +3.5% in 2016, with downside risks related to the social impact of the unpopular decisions (the unemployment rate is 12%).

Germany:  Robust growth outlook, despite summer volatility

Economic activity indicators weakened in September. In m/m terms, industrial production was down 

-1.8%, new orders in manufacturing -0.6%, retail sales -1.4% and exports -0.7%. However, this came after mostly strong increases in August and earlier weaknesses in July, with the high summer volatility linked to the earlier average timing of school holidays and plant shutdowns this year. Hence a look at quarterly data provides a better view. In working-day adjusted y/y terms, industrial production increased by +0.8% in Q3 (+0.4% in Q2), new orders in manufacturing by +1.5% (-1% in Q2), retail sales by +0.8% (+1.4% in Q2) and exports by +0.3% (-0.8% in Q2). Overall, the indicators point to moderate but stable growth in Q3, while the new orders component combined with the recent strength in economic sentiment (see also WERO 26 October 2016) suggests that growth may pick up in Q4. Euler Hermes expects full-year GDP growth of +1.8% in 2016 and +1.7% in 2017.

Emerging Markets:  Big is beautiful

Growth accelerated a little more in the Emerging Markets (EM). The Euler Hermes proprietary aggre-gate EM manufacturing PMI increased to 50.6 in October (after 50.1 in September and 49.5 in July). It becomes increasingly evident that this positive surprise is driven by key EM, mainly China (51.2, best performance since July 2014), India (54.4, best since December 2014) and Russia (52.4, best since October 2012). The positive impulse in these economies came from domestic demand as domestic new orders improved while foreign orders did not as world trade is sluggish (see also our Economic Outlook Trade Wars: The Force Weakens). As a result, real GDP growth is likely to accelerate, but more importantly nominal GDP growth is also recovering since producer prices are no longer falling. In China a 5-year old deflationary cycle is ending. Nominal growth is key in order to achieve stronger turnover and profits growth. Low turnover growth went hand-in-hand with low corporate investment since corporates preferred to hoard cash (USD11trn globally) weighing on world GDP growth.