Waiting for The ‘Trump Effect’

The future, including the economic future, tends to largely resemble the present. Economic projections are made as if they are preludes of fabulous changes, but most of them, if not all, are simple extrapolations of what is already known today. Real, significant economic or political changes are unpredictable; in fact, they are often recognized long after they occur. This is the case with the price of oil; it was falling for months before investors realized the collapse in the international market amounted to a serious strategic distortion. Economic forecasts for 2017 can only be understood today as an extension of current trends. As there is always an unknown alpha, the one for next year is very clear: How far will Donald Trump be able to take his economics project (trade protectionism with increased investment in infrastructure)?

Thus the enigma seems easier — and more innocuous — than when it develops in detail. What lies in the background of Trump’s ads is a political (power) struggle over international trade. The new president has pointed to the enemy, which turns out to be the world’s second economic power, in many ways ahead of Japan. But China is not part of the comfortable collection of economies that follow criteria, such as the euro, pound and yen. Moreover, it is undergoing a phase of economic reforms more complex than they may seem from the outside, which do not predispose its government to diplomatic sensibilities. The greatest risk for the markets is to gauge the depth of the pre-announced confrontation. Strategic conflicts usually end, after tense struggles, in a pact that determines the border respected by both parties. But as long as the balance is reached, investors are likely to receive some scares — volatility, in mercantile jargon.

The rise in the price of oil, after a depressive period that impoverished Russia and Venezuela, supports the hypothesis that in 2017 the world will see a rise in inflation. It would be good news for the European Central Bank, but despite the optimistic projections, it is expected that next year, the two percent prudential line, which would reassure Mario Draghi, will not be reached. What is less clear is whether moderately higher growth rates for the whole of the international economy will come from fiscal stimuli rather than from monetary stimuli. First, Trump has to confirm his expansive investment plan and how he will fund it; then he needs to see that Europe enters the game. Yes, it is true that with a fiscal stimulus program, vital European forces (Berlin and northern partners) are more likely to enter the game of fiscal expansion. But Wolfgang Schäuble and Jens Weidmann have demonstrated great resistance to any arguments of public financial rationality.

To the extent that forecasts are generally reliable, since they follow a predetermined trend, the highest probability for 2017 is slightly higher growth in Europe and the world economy as a whole, awaiting the reaction of the U.S. economy. In meteorological terms, no significant improvements are expected in the future (uncertainty, inequality), nor is there a powerful impulse to improve the overall tax structure (tax havens, unfair competition between countries). It is likely that in addition to geopolitical turbulence, we will also witness Europe’s chronic inability to resolve its banking crisis. In Italy of course, but also in Germany.