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The resilience of the British economy in the post-referendum period has taken many by surprise. Some made rapid conclusions that ‘Brexit has had no effect on the economy'. To state this, however, is to voluntarily omit that Brexit has not yet occurred. We are still at the very beginning of the negotiation process, which started officially on 29 March. The main effects of the referendum result so far have been through foreign exchange.
Whether we're talking about Brexit or, above all, the election of Donald Trump, recent political changes have undoubtedly been shocks. It is no longer simply a question of shifting the cursor of economic policy towards a little less state, less taxation and less social protection. Instead, the aim is to cure the ills of an ailing society by designating scapegoats and demonising the ‘rest of the world' in particular.
The objectives are ambitious. Without its even being necessary to judge the effectiveness of the solutions proposed, suffice it to say that they are above all radical. So radical, paradoxically, that they are not materialising as rapidly as might be hoped by those betting on their effectiveness or as might be feared by those who consider them inappropriate and dangerous.
In the short term, the direct impact on the real economy and on agents' behaviour is minor, because institutional obstacles must first be overcome and/or the assent of national parliaments obtained.
Markets and institutional organisations favour a better recent dynamic in Spain, while Italy stands out as benefitting from a better status on various economic dimensions. Spain has started earlier implementing a series of post-crisis structural reforms, while Italy was standing on a better reform track in the 1990s. The latest impressive round of Italian structural reforms is too young to unveil their impact and has not been fully taken into account by observers.
US economic performance is likely to warrant further gradual increases in the federal funds rate. Chair Yellen reiterated her view that "waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession."
The housing market saw a marked recovery in both 2016 and 2015. The number of transactions rose by 5% in pre-owned and saw a further very sustained increase of 17% in new-build. Prices are picking up once more, although modestly, rising by 1.7% over 12 months in pre-owned in Q3 2016. However, this boom is not quite comparable to a traditional cyclical rebound, and features some weaknesses. In 2017-2018, we lean towards a scenario featuring a slight rise in 10-year OAT rates and lending rates, leading to a slowly declining trend on the market.
As expected the ECB maintained a dovish stance, downplaying the relatively high inflation numbers of December, and focussed the speech instead on the low and stalling core inflation rate, and on the downside risks. It restated its asymmetrical forward guidance: on rates – they can go lower but not higher over the medium term; on QE – it can be increased in size and in duration but not reduced.
The issue of populist movements does not stop at elections. In the longer term, it poses the problem of the legitimacy of elites and solutions for reconciling democracy and globalisation. In fact, we have now entered into a political cycle, ie, a point in history where politics has taken over from the economy and is imposing its own rationality. There is no going back: we are seing a transition of both internal and external political equilibrium.
Despite an uneven growth profile in 2016, the French economy's growth rate finally looks set to come out at 1.1%. Looking ahead, growth is forecast to accelerate modestly. External support factors will continue to have an overall positive impact, even if oil prices and interest rates are starting to edge upwards. In addition, the positive impact of several economic policy measures bear out our growth forecast, whose dynamism is nevertheless restricted by persistent structural constraints.
US risks are likely to materialise in an increase in long-term rates, an appreciating dollar, and, if the expansionary fiscal policy suddenly propels the nominal GDP growth rate well beyond its potential rate, in a far more aggressive monetary policy, especially from 2018 onwards. In 2017, the Eurozone is less likely to be impacted by real transmission channels than by financial ones, due to the tightening of financial then monetary conditions in the United States, resulting in upside pressure on interest rates, to which will be added pressures from its own political risk. In this way it will be up to the ECB alone to provide minimal visibility and steer interest rates. It will need to soothe anxious, volatile markets with the hope that, in 2018, once those national political deadlines are behind it, Europe will exist in a manner other than through its monetary policy alone.
Fears about 'hard Brexit' have escalated in recent days and that has pushed GBP to fresh multi-year lows. We expect the concerns to linger and lower our GBP forecasts. We expect GBP/USD to finish the year at 1.23 and EUR/GBP at 0.90. Further out, we expect a cautious recovery because we believe that 'hard Brexit' will be avoided and that the UK will able to secure an enhanced free trade agreem ent with the EU in the coming years.
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