March 24, 2017
The economic data are encouraging. In the U.S. consumers, business leaders, and investors are hopeful that the Trump administration will be able to reform health care, cut individual and corporate income tax rates, and provide regulatory relief. As this column is being written the Trump/Paul Ryan health care plan appears to be at risk. Even if it manages to get through the House, passage in the Senate will be even more problematical. As this drama unfolds it is likely that currently lofty expectations will soon bump into reality. The pendulum may swing in the opposite direction for a while. But that is OK. Neither the stock market nor the economy move in a straight line. Zigs and zags are the norm.
We continue to believe that ultimately legislation will pass that produces meaningful change in health care, taxes, and regulatory relief, although we also believe that the final product will be less dramatic than expected. We continue to expect GDP growth this year of 2.4% and 2.7% in 2018. We have explicitly boosted this year’s growth rate by 0.1% and 2018 growth by 0.3% to reflect the likely impact of these legislative initiatives. If the process bogs down or fails to pass we will have to ratchet down our expectations. Thus, we readily acknowledge that politics will have a meaningful impact on our U.S. GDP forecast for the next several years. But no not expect success or failure on any one piece of the package to significantly alter that expectation. It will be a protracted process.
While keeping one eye on political developments in the United States keep your other eye focused on political developments in Europe, France in particular. The first round of the presidential election will occur on April 23. There are currently 11 candidates in the running. If no one candidate gathers 50% of the vote, which seems likely, there will be a run-off election between the top two candidates on May 7.
The French election is of particular interest to Americans because of the rise in the polls of Marine Le Pen the leader of France’s National Front. She calls for exiting the European Union, is anti-immigration, and wants to introduce tariffs as part of protectionist economic policies to put “France First”. With GDP growth that is typically less than Germany, a 10.0% unemployment rate, a 24% youth unemployment rate, the highest taxes in the developed world, and terrorist activity on the rise, she has considerable appeal amongst disaffected working class voters in the rust-belt regions of France who feel they are being left behind and in areas with high levels of immigration.
At the moment she is running neck-and-neck in the polls with Emmanuel Macron. They are expected to be the top two vote getters in the April 23 election. But those same polls suggest that Macron will win in the runoff with a victory margin of 2:1 versus Le Pen. However, pollsters’ credibility has been impugned in the past year given their failure to predict either the Brexit vote in June or the Trump victory in November. Understandably, Europeans along with the rest of the world, are watching political developments in France closely. A French exit would be the death knell for the European Union and send shock waves around the globe.
But suppose that Macron becomes the next President of France. He is 39 years old and never held elected office. He stands as an independent because he created his own party. How effective will he be as a leader?
Either outcome is disquieting. A Le Pen victory would likely signal a breakup of the European Union. A Macron victory might be somewhat more comforting initially, but because an imminent breakup of the E.U. would be off the table for now the Euro is likely to rise. A significant increase in the Euro would make European goods and services more expensive for Americans and Asians to purchase, reduce growth in exports, and act as a brake on European GDP growth which is just now emerging from the doldrums.
Our hope is that Macron wins and that E.U. officials take advantage of the apparent acceleration of GDP growth to find ways to diversify growth, strengthen the structure of the European Union, and introduce legislation liberalizing the excessive regulation of the labor market. Failure to do so will only encourage the populist movement in the years ahead.
We are far more comfortable analyzing economic events around the globe but now, more so than usual, political events are likely to dominate the economic landscape.