To be sure, there are lots of unknowns that could significantly impact the US economy, ranging from the shape of the Trump Administration’s anticipated policies on tax, trade, and healthcare that to the fate of major emerging markets including China and Brazil. But overall, the global growth looks OK—neither terribly good or bad.
That was the message Credit Suisse executives recently conveyed to the NeuGroup’s Assistant Treasurers’ Group of Thirty (AT30) at their meeting in Minneapolis last week.
At the start of 2016 there were signs the global economy was emerging from a prolonged slump in the global goods economy. The price of oil and energy investments had collapsed worldwide, and while growth started to improve mid-year, the anticipated three or four rate hikes ended up being just one in December.
When Trump was elected president, business and consumer sentiment shot higher, which Credit Suisse economist Jeremy Schwartz said the bank attributed to over optimism about the impact of proposed Republican policies. But recently there’s been a “bit of a come down” in the global economy that’s reflected in lower commodity prices, he said.
“We think growth in the will be in the low [two percentiles) and the [Federal Reserve] will hike rates twice,” Mr. Schwartz said. “For now, we don’t think that extreme optimism is warranted.”
Mr. Schwartz added that the Fed is likely to change its formal investment policy and seek to shrink its balance sheet, potentially sapping economic growth if offsetting measures such as easing Basel III take too long to arrive.
As far as tax reform, Credit Suisse believes it’s unlikely the Senate portion will be approved before Memorial Day, and that a bill ready for the president’s signature probably won’t arrive until late fall, at the earliest, given the competing timelines for issues such as ACA repeal and the budget resolution. Although the House bill significantly cuts spending on Medicaid, Mr. Schwartz said that expansion of the program under the ACA has provided a significant boost to economic growth, given much of money goes to low-income households who spend it quickly.
Indeed, “Consumer spending, which includes healthcare, went from around 2% growth to closer to around 3%, particularly when Medicaid expansion came on line,” Mr. Schwartz said. There was also an increase in the credit performance of hospitals around the country. He noted that “economically it would be a drag on growth if the House’s current plan were to go through.
Consequently, according to Credit Suisse, the language that significantly reduces Medicaid will probably disappear.
Elsewhere in the world, the victory of Emmanuel Macron over populist Marine Le Pen in the French presidential elections overcame a big political hurdle and suggests voters “were waking up to the fact that the economic situation [in Europe] has improved considerably,” Mr. Schwartz said, noting that the European Union’s 1.5% to 2.0% growth was relatively good.
Credit Suisse anticipates the European Central Bank to begin tapering its asset purchases later this year and talking more about the path toward rate hikes, in part because effectively negative rates have been hurting banks.
President Trump has softened his criticism of China’s trade and monetary policies, so Credit Suisse anticipates less likelihood of a disruptive trade war between the world’s two largest economies. However, China is no longer buying dollars at the same pace and, in fact, at the end of last year became a net seller of USD. One AT30 group member asked who will step in to buy treasuries, given the likelihood that tax reform and/or President Trump’s promised infrastructure rebuilding will result in deficit spending.
Mr. Schwartz said the first buyers would likely be banks and money funds, but he anticipates significant demand both domestically and abroad for Treasuries should the 10-year climb to 2.5%, given a lot of investors have suffered from ultra low rates and would welcome bonds providing longer durations and slightly higher returns.