Monthly comment: High growth in 2017

06.01.2017
When we look at the year it seems likely the US will experience higher growth in 2017 than in 2016, when it was 2.1% to 2.3%, chief strategist David Bakkegaard Karsbøl writes in his latest monthly comment.

With a strong tailwind from both the fiscal policy of the upcoming Trump administration and the monetary policy, which will not fully neutralise the inflationary impact of the fiscal policy, the US GDP growth could sneak over 3% in 2017.
 
The euro zone will experience a GDP growth around the same level of 2016 – and maybe even a little higher if the above expectations for the US materialise. My expectation for euro zone GDP growth in 2017 is 2%, which is considerably higher than the rest of the analyst team, which expects European growth in the region of 1.4% in 2017.

Big spreads in interest rates

The rather large variety of interest-rate expectations and interest-rate levels between the United States and Europe will begin to influence the EUR/USD ratio, which threatens to break below parity (1.00) within a few days or weeks.
 
If we look at the spread between German and US interest rates on 10-year government bonds, it widened to 225 BPs, which has not been larger since 1989. The same trend can be seen in the 5-year yield spreads, and expectations of the Fed's and the ECB's interest rates over the following year.
 
In my opinion, it is dangerous to expect such great differences between these two large regions, as it is difficult to imagine that European leaders at some point don’t take action (as we are already seeing in Germany). It is also difficult to imagine a situation where it goes significantly better in the US economy, but the European economy does not improve.
 
Still, it is my expectation that the EUR/USD will remain under pressure over the coming six months, and that we won’t see a stronger European coordination of emigration management in the EU until over the summer (before the German election).
 
Against this backdrop, I maintain, as in last month's report, that one should not have an underweight in the US. Exposure to US stocks could benefit from both higher equity markets in anticipation of the stimulus from the upcoming Trump administration, but also from a stronger dollar (and weaker EUR).

Read the Monthly economic report here