Trump Dominates, But the World is a Big Place

11/30/-1  Author: David Lieberman, Portfolio Manager

Since the US election, the focus of the world has been on President-elect Donald Trump. Trump commands tremendous attention because of his tweets and personality and this has taken focus away from the news flow in the rest of the world. But the rest of the world remains a driver of the US markets and also contributes to the US economy. Data from most countries around the world is improving. Any additional improvement in the US will also help support growth around the world. Even Europe is showing signs of progress and growth. Is this sustainable? An economist can dream.

Data from European countries continues to suggest gradual improvement. Industrial production is climbing slowly since bottoming most recently in 2012. At the same time non-performing loans are falling. Unemployment has been improving across most European countries as well. Both Spain and Greece unemployment peaked in 2013 at 26% and 28%, but have declined to 18.9% and 23.2%, respectively. Two larger countries, Italy and France, have experienced flat unemployment rates and are in serious need of structural changes. On the other hand, Germany has improved significantly and now has an unemployment rate below 5% for the first time in over 20 years. In all, it has been mixed, but the majority of countries in the EU are slowly improving. This should be further supported by the meaningful rise in the dollar vs. the euro.

At the same time there is significant concern that other countries may follow in the footsteps of the UK, electing to leave the EU. These fears are probably overblown. The UK never adopted the euro and was always far less committed to the EU as a whole. More importantly, but often ignored, are the many surveys that reveal that France, Poland, Belgium, Spain, Italy, and Germany all overwhelmingly support staying in the EU. While the data may change, particularly if terrorist attacks and populist movements grow materially, we’re not at a point where that change is likely.

For years, Japan has given us concern as their national debts spiraled above levels experienced even by the debt-loving Greeks. Fortunately for Japan, soaring levels of debt have been mitigated by falling interest rates, which have helped cushion the cost. In the United States, this has also been true. While debt levels here have climbed significantly, the cost of the interest payments as a percentage of GDP hasn’t climbed at all. If interest rates start rising here and abroad, new debt will become more costly. But interest expense today isn’t the problem.

Japan also has continued to muddle along and the Bank of Japan has been buying up huge quantities of its debt previously owned by the public. In the past, large scale debt monetization has been inflationary in other countries. Japan would welcome some inflation, but so far without luck. Still, this is giving Japan a chance to continue to improve its debt outlook. Unfortunately, one problem that Japan has little chance to improve is its basic demographic structure. Japan’s population is slowly and steadily declining, making economic growth of any magnitude very challenging.

Other emerging markets such as India remain strong despite some headwinds over the next 6 months. India is likely to grow into a significant growth engine for the world over the next decade. Russia and Brazil are both improving again, or more precisely, they aren’t falling much any longer from recent severe recessions. China remains the largest wild card as it transitions into a consumer-led economy. Foreign currency reserves have fallen to about $3 trillion in December, even as the yuan declined sharply to a 5-year low. However, the currency decline will help them export more, US economic policies notwithstanding.

With the US economic data continuing to show strength and with slow improvement around the globe, the world is unlikely to enter into a recession in 2017. Furthermore, with the US at almost a quarter of the world’s GDP, strength from the US will leach across the globe aiding other economies. While the US will continue to be a focus, particularly with such a galvanizing leader, the rest of the world remains on a slow, but steady, growth trajectory for the next year.

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