United States. The defeat dealt to the President and the republican leadership in their attempt to repeal Obamacare makes the reform path longer and more complicated…..
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Intesa Sanpaolo – Research Department For professional investors and advisers only
In the euro area, the cycle is more mature, and the risks to growth are more balanced. ECB to look through downward inflation surprises.
President Trump and the Republican leadership incurred a major defeat in their attempt to repeal Obama’s healthcare reform, which will have negative implications on the Administration’s future actions. The unwavering opposition of a large group of conservative Republicans at the House caused the healthcare bill to be recalled, laying bare the difficulties the Administration faces in bringing the party together and reaching a swift compromise, despite the President’s intervention. Furthermore, the repeal of Obamacare would have brought about tax cuts of around 900 billion dollars over 10 years: now the tax reform will likely be more modest in size, or will have to seek alternative sources of funding.
The Republican leadership and Trump have said that for now the healthcare reform is off the agenda. The next issues to be tackled, while less ideologically charged than healthcare, are equally complex. The appropriation bill on discretionary spending (the current law will expire on 28 April), the tax system reform, the debt ceiling (reached on 15 March, to be increased by the autumn), and infrastructure spending, will be on the table more or less simultaneously.
A weakened President and House Speaker in the wake of the setback on healthcare may be forced to make do with less structural and less ambitious changes than promised, and may even have to seek bipartisan agreements. The tax reform could translate into a simple tax cut, rather than being the epochal event preannounced by the Administration. Lastly, the Republicans’ far-reaching plans of action also face the purely political risk tied to the investigation on Russian interference with the election campaign: this is a major unknown that may work against the President in his efforts to force agreements on the more controversial issues in coming quarters.
In the euro area, the March round of business surveys brought moderately positive surprises on the whole. The composite PMI rose more than expected, to 56.7 from 56. The IFO also beated expectations, showing an improvement (to 112.3 from 111.1, a high since April 2011). The EU Commission’s economic sentiment index remained roughly unchanged at 107.9, from 108. The EU sentiment index is above its long-term average in all sectors, and draws a picture of solid expansion of the euro area economy, across the main member states and supported in particular by German industry, which is clearly benefiting from the recovery in global trade.
Growth in the services and retail sectors has peaked in all likeliness. Confidence surveys for 1Q 2017 are compatible with GDP growth of 0.5% q/q in the opening months of 2017, up from 0.4% q/q at the end of 2016, with moderate upside risks. Alongside moderately encouraging data on the cycle, the increase of euro area inflation to 2% in February was confirmed to be only a flash in the pan, tied to the rebound in oil prices. In March, inflation fell back to 1.5% from 2.0%, well below expectations for a decline to 1.8%. Moreover, core inflation unexpectedly moved back to 0.7% from 0.9%, previously a reading last seen a year ago and one of the lowest ever. The lower than expected March data leave our full year inflation estimate at 1.4% from 1.7% previously. We think that weaker than forecasted core inflation data will offer only limited support to the doves within the ECB council. The ECB has sternly repeated it will look through monthly volatility in consumer prices.
The caution in the ECB’s communication last March was justified by the risks in March down to growth. This morning Coeuré, a leaning dove, indicated that the balance of risks for growth is now broadly balanced and the way forwards is for a gradual normalization. Thus if the more balanced assessment of risks for growth is confirmed in April or June, it is quite reasonable that the guidance on rates will be changed and that the reference to lower rates would be removed Further changes to the current exit sequence (a rate hike only after the end of the QE) if they occur, will be formalized probably only after the summer. However, Knot (Holland) comments made it clear that depo rate hike in early 2018, simultaneously with the start of tapering, should not be ruled out. Knot’s comments were more than explicit, but are not isolate. Nowtny and Lautenschaeger were in favor of the guidance in the short term changes. At the opposite extreme, Praet and Smets have called for caution and to maintain the status.
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