Key points

The inauguration of Donald Trump as President of the United States has ushered in a period of heightened economic and political uncertainty as his Administration embarks on a more nationalistic ‘America first’ approach to trade policy and international relations.

The global economy ended 2016 on a brighter note, and we have made upward revisions to many of our growth forecasts. But many issues and potential hazards remain unresolved, so that the pace of expansion will remain distinctly anaemic compared with what passed for ‘normal’ before the global financial crisis.

The most substantive of our upward revisions relate to the short-term forecasts for the USA, where the policies of the new Trump Administration look set to usher in a spell of ‘reflation’ as infrastructure spending is ramped up and taxes are cut. This reinforces our expectation that the Federal Reserve will quicken the pace of monetary tightening, with two increases in the benchmark policy rate expected this year, and another in the first half of 2018.

These moves will tend to sustain the dollar’s recent strength at a time when no increases are anticipated from the central banks in the Euro Area, Japan, or the UK.

The economy of the Eurozone is performing well by recent standards, with the way once again being led by Germany and Spain. But the boost from the plunge in oil prices during 2014–15 is now abating, while the outlook is also clouded by political uncertainties. Elections are due this year in the Netherlands, France, and Germany, and possibly in Italy as well. The Presidential elections in France, which will conclude on 7th May, will be perhaps the year’s biggest political moment.

In the UK the government has confirmed that it will seek a ‘hard’, or ‘clean’ Brexit: leaving both the Single Market and the EU’s Customs Union. Article 50 will be triggered by the end of March, once the legislation, deemed necessary by the Supreme Court, has been passed.

Britain’s economy continues to display resilience, with full-year GDP growth for 2016 coming in at 2.0% (the fastest in the G7). Sterling has behaved much as expected since the EU referendum and is forecast to soften further during the course of this year. The profile of the anticipated slowdown has been altered, with stronger growth expected this year, but with a recovery taking longer to materialise.

The Bank of England has declared its intention to ‘look through’ the spike in inflation. Provided that the pace of pay growth remains contained, the imminent economic slowdown and continuing Brexit uncertainties should ensure that Bank Rate is left unchanged.

Further out, the prospect of a ‘hard’ Brexit poses more risks for 2019. The Government now appears to accept that a trade agreement with the EU will not be ready in time, so that interim arrangements will be required; if these cannot be agreed, British businesses face the prospect of delays and additional costs in trading with EU countries. Under such a scenario, the slowdown expected during the next two years would be prolonged, and could deepen.