The Focus This Week: New Year, Old Fears
Investors hoping for a calm, worry-free year ahead might want to ask Santa for a more realistic gift. With so many economic and political uncertainties, a quiet year just isn’t in his magic bag.
In the US – home to the world’s biggest economy and stock market – investors will be keeping a close eye on policy changes from the new administration. On one hand, the president-elect has pledged to cut business regulations and taxes, which could boost economic growth and add fuel to the stock market rally. But on the other hand, his plans for steep new tariffs could trigger another spike in inflation – which could force the Federal Reserve (Fed) to pause or even reverse its recent interest rate cuts.
Needless to say, higher-for-longer borrowing costs could curb household and business spending, denting economic growth in the process. Also, if trade partners retaliate in kind, levying tariffs of their own, it could upset global trade while hitting US economic output.
Meanwhile, China – the world’s number two economy – faces a range of challenges, including a prolonged property crisis, elevated debt levels, and bubbling trade tensions. And its sluggish consumers really aren’t helping matters. Policymakers have recently taken aggressive new steps to prop up the economy, making next year a key test of whether the country can regain its footing. The big factor to watch may be whether households start spending again. See, with trading partners threatening to slap steep tariffs on goods from the country, China may have to curb its longstanding reliance on its manufacturing sector and its reputation as “the world’s factory” – and actually get its own consumers to pick up the slack.
Finally, in Europe – collectively the third-biggest economy – folks are particularly jittery about potential tariffs. The US president-elect has floated the idea of a 10% to 20% tariff on all goods coming into the US – and that’d be a huge blow to the bloc’s factories. His vow to slap a 60% tariff on Chinese imports wouldn’t do Europe any favors either: it would inevitably cause many products to be redirected to the European market, further squeezing manufacturers there. And while the European Union could respond by imposing its own tariffs, that kind of tit-for-tat response would risk escalating into a full-scale trade war on multiple fronts. And that’s the last thing the eurozone needs: its two biggest economies – Germany and France – are already neck-deep in political turmoil, driven by their ever-expanding budget deficits.
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