Interest rates are on the rise and there are economic benefits to populism. But for Chinese banks things may get a lot tougher, writes Brian Caplen
After the surprises of 2016, it is tempting to assume that 2017 will deliver up more of the same. For this reason forecasters have expended a lot of energy discussing the political risks of a year when France, Germany and the Netherlands are all holding key elections.
But to think that because 2016 was about the rise of populism – in the form of Brexit, Trump and the Italian referendum – 2017 will go the same way is to make the classic forecasters’ error – assuming that political and economic developments move in straight lines.
In any case, the economic consequences of political shock are not necessarily negative – Brexit did not devastate the UK economy and the government responded with a small fiscal stimulus; in the US the stock market reacted positively to Donald Trump’s victory on the basis that tax cuts and infrastructure spending are on the way.
The significant banking outcome of these two events is that finally the economic cycle has turned and interest rates are on the way up. In the US three rate rises are likely in 2017 and in the UK a rate rise in response to higher inflation is probable.
This is a welcome step away from an abnormal and ultimately self-defeating monetary policy that has hurt savers and crippled bank profits. It is in fact possible to see the Brexit and Trump victories as heralding a new era of supply side economics – deregulation and tax cuts – with fiscal stimulus on top. In other words making business conditions about as good as they get providing, of course, that the US and China don’t get into a trade war.
That does of course leave ongoing problems in the eurozone and China. On the political front voters in France, Germany and the Netherlands may be irritated by the same issues as those in the US and the UK but they will think a lot more carefully before opting for the populist candidate. Brexit will be a walk in the park compared to breaking up the eurozone and will not be undertaken lightly.
Also, the EU’s response to such a victory might be to try and head things off with a large stimulus programme and an end to loose European Central Bank monetary policy – more good news for banks.
The big concern for 2017 is China. Years of distorted growth and rapid lending are bound to show up on bank balance sheets at some point. Currently citizens are voting with their money by trying to put as much offshore as possible. China has spent a considerable amount of reserves trying to stop the currency depreciating and if it doesn’t succeed trade negotiations with US president Trump may become a lot more fraught. The big forecasting error in 2017 might be to focus too much on Europe and not enough in China.
Brian Caplen is the editor of The Banker.
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The Banker's Brian Caplen and Silvia Pavoni discuss the latest Top 500 Banking Brands ranking, led for the first time by a Chinese bank, and look into the 'great rotation', which would have investors moving out of bonds and into equities as the US economy picks up.