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US: Economic risks posed by political uncertainty – BMO CM

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 26, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    Michael Gregory, Deputy Chief Economist at BMO Capital Markets, suggests that there’s about 8½ months to go until the U.S. presidential election and, at this stage, there’s a good chance both parties might proffer populist candidates.

    Key Quotes

    “On the Democratic side, Bernie Sanders is closing the gap in national polls against the more mainstream Hillary Clinton. Real Clear Politics’ average of recent tallies (5 polls in the Feb-10/17 interval) puts Clinton at 47.6% with Sanders now at 42.0% (one tally even put Sanders in front for the first time). On the Republican side, RCP’s average (also 5 polls in the Feb-10/17 interval) puts the populist pair of Donald Trump (34.2%) and Ted Cruz (20.6%) in first and second place, respectively. The remainder of the mostly-mainstream field is as follows: Marco Rubio (at 16.0%), John Kasich (8.6%), Ben Carson (6.6%) and Jeb Bush (5.4%). (Again, a recent national poll even put Cruz in front for the first time).

    Voters have always had to weigh divergent Democratic and Republican policy platforms but, in the past, the leading candidates in both parties tended not to step into the cuttingly unorthodox. Not so this campaign, with the gambit running from the extreme left among the Democrats (Sanders) to the extreme right among the Republicans (Cruz). This is pumping political uncertainty.

    Populism’s ascent mirrors voters’ discontent with the mainstream, which, in turn, reflects the fact that the rising economic tide since the end of the Great Recession has not lifted enough personal ships. (This has indeed been the weakest business expansion in history.) Following the trail blazed by Trump, outrageous policy pronouncements and hyperbole have taken on an air of legitimacy. Until now, never before could a leading candidate openly talk about steeply increasing the progressivity of personal taxation or breaking up the big banks (Sanders), or building a wall along the U.S.-Mexico border or banning Muslims from entering the country (Trump), or adopting the gold standard or abolishing entire government departments (Cruz). All of these merely augment political uncertainty.

    Uncertainty, whether political or economic, is never a good thing for financial markets, let alone business and consumer confidence. With businesses and consumers already concerned about the risk of recession, dollops of political uncertainty could seriously undermine confidence. Confidence is a critical component in the virtuous circle that should allow the U.S. economy to perform adequately amid all the well-advertised global economic and financial headwinds.

    Businesses must be confident domestic demand will grow strongly if they are going to continue or pick up their current pace of hiring and investing. Consumers have to be confident personal income will grow strongly if they are going to continue or pick up their current pace of spending, particularly on discretionary and other big-ticket items. If confidence is undermined, then economic growth could fade in the face of the global economic and financial headwinds.

    We’re not talking about all the way into recession; political uncertainty is not that powerful in America, particularly since populist presidents will still require Congress’ assistance. We’re talking about pushing real GDP growth below potential for a while, until some of the uncertainty is alleviated (a.k.a. a “growth recession”). And, one wonders whether sustained 1%-or worse growth handles would help the populist cause, or hinder it.”
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