Jan Lambregts, MD & global head of financial markets research at Rabobank International
What is your reaction to the UK snap poll and likely implications?
It appears a shrewd move, as the conservatives are ahead of the opposition in the polls and likely to substantially extend its working majority. It further legitimises Prime Minister May’s course, giving her a mandate that was perceived to be lacking. A stronger position for May will mean Brexit is going to happen but allows her to curb the “hard Brexiteers” in her own party. It strengthens her mandate to negotiate and agree to compromises, a likely net positive for the markets. Should Liberal Democrats have a better showing, this could help curb the risks of a hard Brexit scenario.
How are the markets likely to react to an unfavourable poll outcome in UK?
That’s one in which the situation remains muddy — Brexit is going to happen but there is no strong mandate for May to negotiate or keep extremist political elements in check. While financial markets could take a dim view on this and various asset markets, including the pound could suffer, we doubt this by itself will see the US Federal Reserve delay any intentions to hike rates.
How do you assess the first few months of Donald Trump’s presidency?
Trump has had a real reality check in terms of the limits of executive power of a president acting in relative isolation. Failure on the health care bill is now complicating a bill on tax reform and fiscal stimulus. While the republicans have a working majority, they clearly aren’t acting united. This is nothing new: Hope springs eternal and reality is simply catching up with this new president. The question is what he is going to do next. Will he move into more of a mainstream presidency, take a stronger military bend to distract from the difficult domestic agenda, or get more active in areas where he has relatively strong executive powers, such as trade.
Are global financial markets over-playing on protectionist policies?
The risk of protectionist measures damaging the global economy certainly hasn’t faded. If anything, global financial markets have been too focused on the potential positives of the Trump presidency on the fiscal front, and not enough on geopolitical risks and the threat of protectionism.
There appears a sense of market relief on China that we find hard to be comfortable with. China’s actual growth model hasn’t really changed much in recent years. It still overly depends on credit expansion to fuel fixed asset investments and reach lofty gross domestic product targets. Ultimately, that’s unsustainable. The question is when will it come to a head. For Japan, it’s the same old story. Actual reforms are taking place piecemeal and insufficiently, while the Bank of Japan’s (BoJ’s) struggling to innovate its way out of the current environment: How to improve inflation without being seen to blatantly print money?
Your estimate for global economic growth in FY18?
The estimate remains largely unaltered at slightly over three per cent, as we believe the current cyclical upswing should prove limited by ongoing structural issues. The near-term outlook might be slightly better but seems driven by China’s debt impulse, while the large discrepancy between hard and soft indicators is not necessarily pointing to higher growth in the future.
What have been the key hits and misses of the Modi government?
Modi’s Goods and Services Tax reforms passing through parliament and the rolling out later this year are a considerable step forward. While the demonetisation push was likely a short-term negative, it should work out positively in the long term, by bringing more payments into the official sector and expanding the tax base as a result.
What more would you like in terms of policy action in the remaining tenure?
One of India’s key challenges is in liberalising of capital markets. Bond markets are still in a nascent stage. Further, there remains significant scope for labour market reforms and improvement in ownership rights. Modi has tried to push forward here. But the political reality is his Bharatiya Janata Party doesn’t hold a majority in both Houses of Parliament. Even as Modi is trying to expand his political base, a majority in both Houses doesn’t appear within grasp. Hence, fresh reforms will be difficult to enact.