WERO N°3: US, UK, Turkey, South Korea


U.S.:  Trump becomes President​

Donald Trump was sworn in as the 45th President of the U.S. on 20 January. Trump ran on a populist, anti-trade, “America first” agenda, making his election controversial and polarizing. His economic proposals include a 10-year plan to cut income taxes by USD5.5tn and increase inf​​rastructure spending by USD10tn, corporate tax reform, and aggressive deregulation. The plan is expected to add +0.5% to 2017 GDP and has spurred consumer and business confidence with stock prices setting record highs. But policies on immigration reform and free trade (in addition to spending) are expected to be inflation¬ary, driving interest rates and the USD up. Other concerns include increased government debt and the possibility of a trade war. Trump’s Republican Party holds a majority in both houses of Congress for at least two years, making it likely that his proposals will be implemented in one form or another. He has also operated outside normal governmental bounds, convincing corporations to stay in the U.S., and getting cost cuts from government suppliers. He immediately signed executive orders to repeal Obama¬care, withdraw from TPP, reduce regulations, and boost infrastructure projects using U.S.-made steel.

UK:  Consumers counterbalanced the Brexit effect in 2016

Q4 GDP increased by +0.6% q/q, the same pace as in Q3 and Q2 . This was above expectations of +0.5% by consensus and +0.4% by EH. Once again, the services sector was the only positive contribu¬tor to growth in Q4 with a strong contribution from consumer-focused industries such as retail sales and travel agency services. Industrial production and construction were flat in Q4 after contracting in Q3. Full-year 2016 GDP growth came in at +2%, in line with our expectations. The demand-side breakdown will be available on 22 February. Private consumption is expected to have remained the main driver of growth in Q4, estimated at +1% q/q, up from +0.7% in Q3. Also, the households’ savings rate reached a low level of 5.6%, the lowest since 2008, while confidence has remained relatively resilient. However, consumers’ view on their future economic situation in the next 12 months has deteriorated strongly since November. Coupled with a rise in prices (average inflation forecast at 2.5% in 2017, after 0.9% in 2016) and the likely slowdown in wages, this should result in lower purchasing power.

Turkey:  Timid monetary tightening

The Monetary Policy Committee kept its key policy one-week repo rate unchanged at 8% on Tuesday, somewhat surprisingly as inflationary pressures have risen in the wake of the recent TRY depreciation and increasing food and energy prices. However, the overnight lending rate was raised by 75bps to 9.25% while the overnight borrowing rate remained unchanged at 7.25%. Inflation picked up to 8.5% in December (from 7% in November) and is expected to rise further to around 10% in the next months as a result of higher oil and food prices and the impact of further currency weakening. After losing -10% against both the USD and the EUR and hitting a record low in the first ten days of this year, the TRY lost again -2% over the past two days as markets had expected a bolder monetary tightening. Exchange rate risks will remain high as ongoing large external imbalances and political uncertainty continue to weigh on investor sentiment. A possible downgrade by Fitch Ratings Agency to speculative grade (a decision is expected by the end of this week) might cause a renewed drop in the TRY. EH expects further, and perhaps more decisive, monetary tightening to come in the next months.

South Korea:  Slowing momentum

Preliminary estimates point to a slowdown of real GDP growth to +0.4% q/q in Q4 (from +0.6% in Q3). Exports contracted by -0.1% q/q (after +0.6% q/q in Q3) while domestic demand weakened due to a decrease in construction investment (-1.7% q/q) and a lower increase in private consumption. Yet, full- year growth of +2.7% was in line with the central bank’s target and slightly up from +2.6% in 2015. Euler Hermes expects GDP growth to decelerate to +2.5% in 2017 and an uptick to +2.7% in 2018. Political uncertainties and high household indebtedness (94% GDP) will weigh on domestic consump¬tion. Externally, any acceleration in export growth will be limited due to modest improvement in global demand and more global protectionist sentiment. Moreover, further tensions with China (due to Korea’s decision on deploying a U.S. Terminal High Altitude Area Defense anti-missile defense unit) could have a detrimental effect on exports. For now, China has already banned 19 Korean cosmetics products.