Overseas Headlines – January 3, 2017

The dollar’s appreciation may represent the U.S. economy’s biggest speed bump in 2017

The dollar’s appreciation may represent the U.S. economy’s biggest speed bump in 2017, and that could be good or bad, depending on whether President-elect Donald Trump follows through on measures aimed at accelerating growth. The Bloomberg Dollar Spot Index, which tracks the greenback against 10 global currencies, has gained 5.7 percent since the Nov. 8 election, largely on expectations for lower taxes, higher government spending and looser regulations under Trump. All these could boost growth and pose questions for the Federal Reserve. The potential for stimulus comes with unemployment already at a post-recession low of 4.6 percent and inflation creeping closer to the Fed’s 2 percent target. Even without fully factoring in Trump’s fiscal plans, central bank officials in December raised the number of rate hikes they foresee in 2017, from two to three, as they signalled greater confidence in the economy. Chair Janet Yellen even warned members of Congress on Nov. 17 that new fiscal stimulus could have “inflationary consequences” that the Fed would have to take into account. In that environment, a strengthening dollar will help the Fed keep the economy from overheating by dampening exports and inflation should Trump deliver on his growth-boosting agenda. If, however, the Trump bump never quite happens, or takes longer to make itself felt in economic activity, the dollar’s appreciation could prove premature and problematic.

South America:
Brazil posted its largest yearly trade surplus on record

Brazil posted its largest yearly trade surplus on record as recession smothered domestic demand in Latin America’s largest economy. The country’s trade surplus rose to 47.7 billion dollars last year compared to 19.7 billion dollars in 2015, according to trade ministry data released Monday. Imports fell 19.8 percent from a year earlier to 137.6 billion dollars, while exports fell 3.1 percent during the same period to 185.2 billion dollars. Brazil’s trade balance has jumped as high unemployment and falling investments prolong the country’s economic downturn and undercut imports. Meanwhile, even a decline in the currency, which hovered near a record low at the start of 2016, failed to result in an annual increase in exports. In the past month, analysts have increased their trade surplus forecasts for this year to 47 billion dollars while cutting growth estimates in a sign that an export-led recovery may not materialize. Imports have collapsed under the weight of Brazil’s worst recession on record, which has seen gross domestic product contract for seven straight quarters. Over 12 million workers are out of a job, and above-target inflation has corroded real wage growth.

China should set a more flexible 2017 economic growth target

China should set a more flexible 2017 economic growth target to give policy makers more room to enact reform, according to Huang Yiping, an adviser to the People’s Bank of China.
He proposed a range of 6 percent to 7 percent for this year, compared with the 6.5 percent to 7 percent objective in 2016, the official Xinhua News Agency reported. Last year’s target, the first <http://www.bloomberg.com/news/articles/2016-02-03/china-sets-6-5-to-7-economic-growth-target-range-for-2016> range in two decades, was down from 7 percent for 2015 <http://www.bloomberg.com/news/articles/2015-03-05/china-lowers-growth-target-to-about-7-as-headwinds-intensify>.The country’s leaders also have a longer-term objective. President Xi Jinping has said he wants expansion to average at least 6.5 percent in the five years through 2020 to achieve the Communist Party promise of building a “moderately prosperous society” by that year with gross domestic product and income levels double those of 2010. "The 6.5 percent target is just an average rate," Huang, an economics professor at Peking University, told Xinhua in an interview published late Sunday. "As long as employment is stable, a slightly wider growth target range in the short term will reduce the need for pro-growth efforts and give policy makers more room to focus on reforms."

German unemployment extended its decline in December

German unemployment extended its decline in December amid signs that growth in Europe’s largest economy accelerated at the end of last year. The number of people out of work fell by a seasonally adjusted 17,000 to 2.638 million, data from the Federal Labour Agency in Nuremberg showed on Tuesday. Economists in a Bloomberg survey forecast a drop of 5,000. The jobless rate remained unchanged at 6 percent, matching the lowest level since reunification. Germany’s economy expanded at a “significantly faster pace” in the fourth quarter, driven by improvements in industry and private consumption, according to the Bundesbank. Business sentiment as measured by the Ifo research institute rose to the highest level in almost three years in December, signalling strong growth momentum going into the new year. “What makes us optimistic for the 2017 labour market is that domestic consumption is strong, which is in turn a consequence of the good job market,” Frank-Juergen Weise, president of the labour agency, told reporters. Unemployment won’t increase this year, he said.