Though Donald Trump’s election has amplified concerns about a rollback of free trade, signs of upside trends in services trade and continued recovery in container trade point to moderately better trade growth in 2017, notes Goldman Sachs (NYSE:GS). Allison Nathan and Marina Grushin of Goldman Sachs in their December 19 research note titled: “2016 Update, and a Peek at 2017” believe amidst Trump, China and key European elections, 2017 is set to be another interesting year for markets.
China Remains Key Risk In 2017
The GS analysts in the latest series of “Top of Mind” research reports consider 2016 as “chock full of surprises” for both markets and politics, with 2016 beginning with a perfect storm of worries, marked by plunging crude prices and sharp depreciation in China’s currency.
Despite Chinese policymakers initiating an ambitious stimulus program, Nathan and Grushin believe China is not far from the surface, as they anticipate the country would witness capital outflow pressures amid USD strengthening. The analysts anticipate China’s GDP growth would sequentially decelerate into 1Q17 to c.5.5% annualized on the back of recent tightening measures. The GS analysts forecast a $/CNY fix of 7.00, 7.15, and 7.30 in 3, 6 and 12 months respectively:
Nathan and Grushin consider UK’s vote in favour of Brexit as “one of the biggest political shocks of 2016” and believe Article 50 required to activate formal start of UK’s withdrawal process won’t be triggered before March. Though they believe UK growth has proved remarkably resilient, next year could witness a moderation in UK growth and a further decline in sterling. With a weaker currency and higher import prices harming margins, the GS analysts anticipate there would be continuous pressure on UK domestic-facing stocks.
WTI Oil To Touch $57.50/bbl In 1H17
Touching upon policy stimulus initiatives, the GS analysts argue that despite recent market optimism about fiscal expansion offering more stimulus, central bank policy will never be too far from investors’ minds next year. They anticipate a fiscal easing of 0.5% of GDP in 2017 in Euro area, while forecasting a scaled-down version of the fiscal proposals of Trump and the Republican House leadership.
Focusing on trade trends for 2017, Nathan and Grushin maintain that structural headwinds are likely to continue to hold back the growth in global trade more broadly. They believe any tariff increases won’t be applied across the board by the incoming US administration, as goods trade flows differ substantially by country and product:
Tracing recent Brent crude oil price movements, the GS analysts point out that the prices jumped to about $55/bbl, a jump of nearly 18% shortly before OPEC delivered a bullish announcement on November 30 that included OPEC and non-OPEC cuts. The analysts forecast Brent crude oil peaking in 1H17 and limited upside beyond the high-$50/bbl range, as prices in this range would lead to enhanced production form US shale and other lower-cost producers.