For politicos, 2016 was a tale of two populist shocks: Republican real estate mogul Donald Trump's victory in the U.S. presidential race and Great Britain's decision to leave the European Union.
In 2017, the fallout from those two votes will play a pivotal role in determining economic growth in much of the western world, according to assessments from Deutsche Bank (DB) economists. A stimulus from President-elect Trump and the Republican-controlled Congress should drive expansion by U.S. businesses and consumers, which will, in turn, benefit U.S. trading partners.
In Europe, however, the benefits of that growth will be pared somewhat by confusion about how and when Great Britain's departure from the 28-member bloc will take place.
"The key thing for Europe, as you all know too well, unfortunately, is political uncertainty," Torsten Slok, Deutsche's chief international economist, said in a conference with reporters Thursday in New York. Still, he said, "sentiment is coming back with Trump, and sentiment is very important for the outlook because we're hoping it will unleash the animal spirits."
Indeed, markets in the U.S. have already surged since the Nov. 8 election, with the Dow Jones Industrial Average and the Standard & Poor's 500 each reaching record highs.
"The Trump election was a game-changer," said Joseph Lavorgna, chief U.S. economist for Deustche. "It brought fiscal policy back into focus. Consensus had determined, and I think rightly so, that that was significantly paralyzed."
In government circles, fiscal policy refers to attempts to boost the economy through government stimulus, typically via tax cuts or spending on infrastructure such as highways and bridges. Such measures were virtually sidelined due to Congressional wrangling with Democratic President Barack Obama for six of his eight years in office.
Republicans took control of the House of Representatives in 2010, two years after Obama was elected, and regained the Senate four years later.
While it's still difficult to say what contours a stimulus might take, "you have to assume it will be something of some scale, simply because Republicans have both houses," Lavorgna said. "That's something Reagan didn't have when he was inaugurated in 1981 and Bush 43 didn't have when he was inaugurated in 2001."
Ronald Reagan, the 40th U.S. president, and George W. Bush, the 43rd, both pushed economic stimulus programs early in their terms. Reagan's was intended to end the economic malaise of the 1970s and Bush's to curb the effects of the dot-com bubble bursting.