We will doubtless revisit the new policy agenda in more detail as the inauguration approaches, but in the meantime we wanted to share the following, highly subjective guidelines:
As we write, there is still a lot of uncertainty surrounding the new administration’s personnel and policies.
Meanwhile, looking to 2025, global economic risk may be tilting back in the inflationary direction. When the new administration takes office, an even bigger US structural deficit is likely. China’s fiscal package may have disappointed local investors, but is significant nonetheless – and maybe unfinished. The new UK government’s first budget was firmly pro-cyclical, despite talk of imaginary fiscal ‘black holes’, while Germany’s coalition government has fallen because its proposed budget wasn’t.
Of the larger economies, only France seems to be trying to tighten fiscal policy meaningfully. Meanwhile, alongside this fiscal impulse, interest rates are falling – with unemployment still low, business surveys stabilising, and private sector cashflow healthy. For more than two years economists were braced for a material setback which did not occur. Are they about to miss a material upturn?
Many diagnose ‘secular stagnation’. We remain sceptical, and in the essays below suggest that three perceived structural constraints on growth – debt, real interest rates and protectionism – may be less binding than feared.
Stronger growth would initially be welcomed by stock markets, and for now, from our top-down perspective, we still prefer stocks to bonds, and the US to most other regions. After the US market’s recent run, however, a lot is being taken on trust: valuations there are back at 2021 levels, and this time interest rates are higher. Those rates are falling now, but if reflation looms perhaps they ought not to do so for much longer. Of course, central banks have learned from their mistakes, and are no doubt capable of repeating them exactly.