FINANCIAL NEWS HIGHLIGHTS OF THE WEEK
- The Tax Cuts and Jobs Act was passed by Congress and signed by the President this week.
- The U.S. economy continues to show signs of strong momentum heading into 2018. Housing activity is recovering nicely from late summer hurricane-related disruptions, and consumer spending is on pace to expand at a 3.0% annualized pace this quarter.
- Looking ahead into 2018, political events in Europe are likely to continue to dominate headlines in the New Year.
Visions of Tax Cuts Dancing in our Heads
From an economist’s perspective, it’s difficult to be disappointed with how 2017 turned out. After a bumpy start to the year – courtesy of a phenomenon coined ‘residual seasonality’ – growth in the U.S. held at a 3.0% pace for the remainder of 2017, well above trend estimates at just under 2.0%. Moreover, stronger-than-expected growth became a global theme, as G7 economies broadly surprised to the upside. Since the middle of 2016, Canada, the U.S., the Euro Area, and even Japan reported growth well above trend estimates. Strong growth spurred central bank action, with the Fed raising rates thrice, but no longer alone in removing stimulus. The Bank of Canada raised rates twice in late summer, while the Bank of England followed with a rate hike in November. Not to be left out, the ECB followed through with earlier communication of reducing their pace of monthly asset purchases, halving them to €30 billion starting next month.
With the U.S. economy running hot, additional stimulus in the form of tax cuts seems unnecessary. But, after months of debate, Congress this week approved tax cuts that will leave American households and businesses with more money to spend for the next five to ten years. As covered in our note, we anticipate that the plan should help to stimulate economic activity in the medium-term, but at the expense of higher debt that may necessitate future cuts to entitlement spending, or higher taxes. Nevertheless, U.S. stock markets rallied in response to the news, while bonds markets sold off sending yields a touch higher on the week.
Heightened levels of economic optimism are to be expected with growth running hot globally. However, geopolitical events are stewing in the background, threatening to knock the current expansion off course. Looking ahead into 2018, concerns about North Korea’s military ambitions will remain, as will tensions between the major powers in the Middle East. And, like a broken record, political events in Europe remain on the radar. Phase two of Brexit negotiations are set to begin early in the New Year, and EU officials this week stated that they will have a EU-Canada style trade agreement in their pocket in case negotiations fail to make material progress by summer. Moreover, results from this week’s Catalonian election shows strong support for independence-minded parties, suggesting the potential for economic uncertainty to linger in Spain, the Euro Area’s fourth largest economy
Add elections in Italy, Sweden and Eastern Europe next year, and it’s clear European politics will dominate headlines for another year. We hope that once again strong 2,000 economic growth manages to trump uncertainty in 2018.
Fotios Raptis, Senior Economist
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