June 2017 Global Macro Views

Formulating an outlook for growth and inflation around the world is always an exercise in political economics. This time round, there was a larger share of politics relative to economics than the norm, and both proved challenging. In particular, the voters of the UK and the president of the US retain their ability to surprise.

The bet of UK Prime Minister May to call an early election so as to widen her parliamentary majority backfired, promising to complicate already complicated divorce proceedings with the European Union. Ms. May may keep her job, but the governing coalition would be fragile, as it depends on the cooperation of a single-issue party (Northern Ireland nationalists), and Conservative challengers to her lurk in the hedgerows. This raises the risk that the UK exits from the EU without alternative trading relationships in place. That said if European leaders want the UK to stay in the single market, they may have to be somewhat more accommodating on terms to keep British negotiators at the table. But that is a big if, in that after the French elections went decidedly in favor of the pro-integrationist Emmanuel Macron, continental Europeans might be satisfied with keeping their own company. On net, we think that the probability of a hard exit went up but the terms of a soft one, if it can be had, will be more forgiving.

President Trump worsened his already damaged relationship with the Washington establishment, creating additional distractions that risk further delaying the passage of legislation and relaxation of regulation. We were never breathless with excitement about the magnitude of the effects and speed of passage of fiscal reform, as partisan wrangling have turned the speed bumps envisioned by the founders of the checks-and-balances system into brick walls. But changing the leadership of the regulatory agencies offers the prospect of meaningful relief for the energy, financial, and health care industries. Even here, where the executive branch has more leeway, the Trump administration is moving slowly on top appointments.

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