While the broader environment might be defined by the absence of volatility and a synchronized global recovery, risks remain, finds a Manulife Asset Management report.
“The abundance of capital and the easing monetary conditions across the globe have allowed us this period of time where we’ve seen remarkably low volatility, and our forecast for 2018 shows continuing easing conditions,” said Bob Boyda, head of Capital Markets and Strategy at Manulife Asset Management, in a release.
However, he notes that the prospect of rising costs, unexpected market response to Fed actions and unresolved geopolitical tension could hurt U.S. corporate profits. “If profit margins come under pressure from rising wage costs, interest costs and potential cost increases in areas like energy, with equities having been priced for perfection, investors could be disappointed,” he said.
Megan Greene, chief economist at the firm, agrees, adding that the world remains in a low-growth, low-inflation and low-rate environment, despite the global synchronized recovery. “The IMF upgraded its global economic forecast for the first time in years,” she said, “but we believe the downside risks outweigh the upside risks and the markets have not priced it in.”
Proposed U.S. tax reform
Greene said while the tax debate has been necessary, she does not think the outcome will move the needle for the U.S. economy. “The administration has been right to argue that the U.S. badly needs tax reform. It is also right to argue that, whereas the focus for the past two tax cuts has been on income taxes, this tax bill should focus on corporate tax change. But given how the proposals for this tax bill seem to be structured and—more importantly—funded, we do not think this tax bill will fundamentally shift U.S. growth from its potential GDP growth rate of around 2%.”
She continued, “Most importantly, this tax bill will increase the national debt burden. Not only will this be a drag on growth in the medium to long term, but measures will have to be taken to address this—including a possible tax hike.”
Uncertainty over NAFTA
Greene thinks there remains a risk that the U.S. will unilaterally withdraw from NAFTA. If this were to happen, she believes it is likely the U.S., Canada and Mexico would revert to WTO rules and that the U.S. and Canada would reprise the bilateral trade deal they had before NAFTA.
“There would be immediate disruptions to trade, and firms are likely to pass on the higher costs to consumers, contributing to rising inflation in the U.S. and a stronger U.S. dollar,” said Greene.
“It is also possible that the U.S. will avoid withdrawing from NAFTA cleanly and, instead, turn it into a messy, uncertain half-way house. This could result in a series of legal challenges, not only over how the U.S. could withdraw from NAFTA [logistically], but also businesses suing the government over the ambiguous arrangement.”