Where America in 2017?

12 December 2016 | Markets and Economy


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Leo Schulz (senior writer, Vanguard Asset Management): Where America in 2017? The US has been a big story in 2016, and we expect the same in 2017. Peter, there's been a very hard fought election in the United States, a change in the presidency, change in Congress, what's going to be the impact?

Peter Westaway (chief economist, Vanguard Europe): Well, I think the first thing I would say is that many people get very excited about general elections, but actually if you look back through history the difference between a Republican administration and a Democrat one is actually pretty small.

Leo Schulz: But Donald Trump in a way, Peter, is neither a Republican nor a Democrat is he? He is something quite different surely.

Peter Westaway: Well I think that's right. And I also think that the market is certainly perceiving a shift in policy coming along. So over the short run we're seeing expectations of a boost to fiscal policy, which could lead to an increase in growth, an increase in inflation, and certainly the market is reflecting that. Whether all that will actually happen in practice I think still remains to be seen. And then looking further out I think there's uncertainty about some other policies that the new administration might bring in, which might have negative connotations for the economy.

Leo Schulz: So you mentioned a change in fiscal policy, which I think essentially means that Donald Trump wants to spend a lot of money doesn't he, particularly on infrastructure. But some of those other policies, Peter, that you're alluding to there, what sort of thing are you talking about there?

Peter Westaway: Well there's a couple of things that could act as a headwind to growth. First of all, some of the policies that might mean that the US trades less with the rest of the world. That could act to dampen growth in the United States. And then the second one is around immigration policy, which could mean that if the number of people working in the US shrinks a little bit, then that will also mean that there's less GDP growth.

Leo Schulz: Alexis, how is this going to impact on US interest rates?

Alexis Gray (Vanguard economist): Well, in fact in 2017, Leo, we'll see a further increase in interest rates in the US. Based on what you see in this chart here, which is that on the left scale you have inflation and on the right scale you have wages. As you can see, they've been gradually picking up. In fact, inflation is roughly at the Fed's 2% target, which means that it's time to continue raising interest rates.

Leo Schulz: And that would be a 3% annual increase in wages that we're now starting to see. That seems quite punchy, Alexis. Peter, this new regime, new political regime, interest rates rising, is America a bit of a dangerous place for an investor in 2017; is it somewhere where maybe people might want to be on the sidelines?

Peter Westaway: No, I don't think so. I think it's still really important for investors to invest long term, and we would typically say that a good starting point for an asset allocation is to allocate your funds pretty much in proportion to the size of the market.

Leo Schulz: Change does seem to be coming to the US. But there's still a long way to go before we really see the scale or the impact. Peter Westaway, Alexis Gray, thank you both very much.

Peter Westaway: Thank you.

Alexis Gray: Thank you.

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