February 2017

• For the first time in years, we see the possibility of an upside in global growth rather than the opposite. Stronger data keeps coming from the countries/regions that matter the most economically: the US, the EU, China and Asia. Therefore, (1) the strengthening of the global economic cycle coupled with a synchronized expansion in manufacturing, and (2) an anticipation of fiscal stimulus in the US, should deliver global growth of around 3.5% in 2017. As a result, global inflation will pick up. There are, however, numerous and varied downside risks (ranging from trade to geopolitics) that could cloud this rosy scenario.

• We have a hard time nurturing this optimism beyond a 1-2 y time-horizon because the US economy will not grow as much as the optimists hope – and certainly not at the 3%+ growth rate anticipated by Trump. First, the situation of full employment masks the salient fact that there are still 20 million Americans left behind, either (1) looking for work, (2) out of the labour force while they’d prefer to be in it or (3) in-between gigs. Second, GDP/capita growth (a more relevant indicator than GDP alone) is now at 1.1% per year, less than half the 2.3% it achieved at the end of last century. Slower growth not only creates social strains, discontent and polarisation; it also dampens our animal spirits and creates a culture of risk aversion – it has feedback loop properties.

• Put another way, sustained higher economic growth is incompatible with populist policies. In the face of an ageing population, it cannot be achieved while curbing immigration because long-term potential growth = growth in the labour force + growth in productivity (nil at the moment). Furthermore populist sentiments negatively affect international tourism: a key, albeit underrated source of economic growth and employment (last year, US visitor exports generated almost $200bn, 8.5% of total US exports). . .

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