Expect the economy to be more of the same for the balance of 2017, although there are signs of movement on a renegotiation of NAFTA.
According to chief economist Bart van Ark, there’s some “strengthening in the global economy happening in most places around the world, but not in the U.S.…The long-term trend of the global economy remains extraordinarily slow.”
Van Ark said the cyclical tailwinds in late 2016 ran through the first quarter of 2017, but it’s too early to see if those tailwinds will improve the structure of the economy. That translates into no real economic growth right now. The economist said while the U.S. economy is slowing improving through the first two quarters and into the back half of the year, the fiscal policy trends that were expected back in November shortly after the election haven’t really materialized, which is holding back economic growth.
He also noted that while the emerging markets had a strong start in 2017, the latest data from April suggests that those tailwinds might be slowing a bit as well. At issue for these countries — mostly China and India — are the adjustments needed to change from an economy relying on exports to one that relies on services and consumption. Brazil is coming out of its recession, and along with some growth in certain European markets, global GDP is expected to grow to 2.9 percent in 2017 from last year’s 2.5 percent.
As for global monetary policy, van Ark describes it as “accommodative,” particularly in the U.S. He also said that while there is an expectation of the Fed raising the interest rate this week, there is also the possibility of another rate hike later this year.
The chief economist expects the U.S. to see close to 3 percent growth in the second quarter — after the first quarter’s weak 1.2 percent rate — before settling into a 2 percent range for the balance of the year. “Some fiscal stimulist effects were expected to happen, but given the political landscape, not anything got passed. Corporate tax reform, at the earliest, will be 2018,” van Ark said.
He believes some type of corporate tax reform, even if moderate in scope, could happen in 2018, but it’ll “still be awhile before it translates into something faster in the economy.”
Van Ark explained that the government needs to provide more fiscal stimulus to get short-term spending up, which will create more inflation and, subsequently, rising wages. “You have to get more people into the labor market and have to get productivity growth to 2 to 3 percent a year. It’s a tall order, and [there’s] too little in current policy proposals to achieve [anything] anytime soon,” he said.
As for trade policy, economist Ken Goldstein said while there’s a recognition by the new administration of the need for a renegotiation of NAFTA, the complications of the existing agreement mean that talks could “play out over several years.” Van Ark noted there is definite movement along those lines, but right now activity is mostly centered “behind the scenes on how to take different positions.”
As for risks to the economy, Goldstein said “interest rates rising faster than the mortgage markets expect could create a risk,” while another could be a “loss of confidence in the stock markets, which could cause investors and consumers to flip their outlook and start the U.S. on a downturn.”