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Politicians Aren't Nearly as Important to Economy as They Think They Are

Politicians Aren't Nearly as Important to Economy as They Think They Are
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Monday, 20 November 2017 10:21 AM Current | Bio | Archive

Talks about a new coalition government in Germany have collapsed over the weekend.

For now, Chancellor Angela Merkel will stay on as a caretaker Chancellor. She will speak to the German president about what to do next. The euro is little changed in Asia and European trading this morning.

Now is probably a good time to remind ourselves that politicians are, economically speaking of course, not nearly as important as they think they are in the short term.

The economy of Germany will continue to exist. The European Central Bank (ECB) will continue to exist.

However, a minority German government or new elections, and knowing what we know today, Merkel has only a limited chance to survive, and if that would be the case, then that would change Germany’s international position.

Germany’s role in Europe is likely to be diminished and the role of France is likely to be increased if Germany is going to have a period of domestic political uncertainty.

That may also have a bearing on the Brexit divorce proceedings of course and may even put stress on the EU summit that is scheduled on December 14-15.

A key U.K. cabinet subcommittee meets today and is expected to allow Prime Minister Theresa May to present her Brexit divorce payment offer to the EU for at least 40 billion sterling or about $53 billion.

Zimbabwe is also facing some domestic policy uncertainty. President Mugabe gave a televised address on Sunday that was expected to include his resignation announcement. No resignation announcement was in fact made.

Impeachment proceedings are now expected to commence in Parliament.

This has little global financial-market impact.

There is a positive invasion of European Central Bank (ECB) speakers including ECB President Mario Draghi who speaks at the ECON Hearing of the European Parliament in Brussels, Belgium.

These comments do tend to be something like a letdown however as there is not much uncertainty around the immediate monetary policy path and it is too soon for any sensible comments to be made about the ECB’s longer term monetary policy path.

Finally, the United States has another round of talks over NAFTA with the Trans Pacific Partner shift (TPP) continuing without the United States.

Relative trade barriers are rising against U.S. exporters. The TPP is a preferential trade deal without raising absolute powers against the Unites States. A successful TPP deal will give preference to trade within the partnership.

A breakdown of NAFTA is not expected, although uncertainty has risen as a result of some of the proposals around the trade deal. The lack of movement on major issues such as autos rules of origin could put the North American Free Trade Agreement negotiations in danger of grinding to a stalemate as an early 2018 deadline for revising the pact approaches.

On Friday, Goldman Sachs raised its U.S. growth outlook for 2018 to 2.5 percent and lowered its forecast for unemployment to 3.7 percent by the end of 2018. Goldman Sachs also expects the U.S. jobless rate, which was 4.1 percent in October, may reach 3.5 percent in late 2019, which would be the lowest level since the late-1960s.

The note reads: “We expect that a tight labor market and a more normal inflation picture will lead the Fed to deliver four (4) hikes next year.”

For investors, and if Goldman Sachs gets it right, than there is no doubt that four rate hikes will impact the financial markets, and certainly more than at present is calculated in. Also, higher fed-funds rates should support the dollar.

By the way, if four rate hikes should be applied then this is one rate increase more than the median forecast of the Fed officials at present.

At the FOMC meeting on December 12-13, we will get the latest Summary of Economic Projections as well as a press conference by the Chair.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Now is probably a good time to remind ourselves that politicians are, economically speaking of course, not nearly as important as they think they are in the short term.
politicians, important, economy, investors
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2017-21-20
Monday, 20 November 2017 10:21 AM
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