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Late-cycle boost

An increase from 1.5% to 2.1% here, and a cut from 2.1% to 1.6% there. What is this all about? These are our 2017 economic growth forecasts for the Eurozone and the United Kingdom. The first figure of each pair dates from March 2016, which was still before Brexit and Trump's election, while the second figure represents our current forecast. Why do I mention this? Because it raises two key issues that we are currently focused on: the interplay of politics and business, as well as the acceleration of economic growth. Let's start with the Eurozone, which is growing much faster than expected. Despite the electoral success of populist parties at the German federal election and despite the tensions in Catalonia, the European Union is politically more stable today than many feared at the beginning of 2017. Companies are optimistic, and consumer confidence is at its highest level since 2001. This is not the case in the United Kingdom, where consumer skepticism has been growing since mid-2015. In terms of economic growth, the UK has now slipped to the bottom of the pack among G7 nations. This shows that politics can indeed impact businesses and stock markets. Since the referendum, the mostly UK-focused FTSE 250 has been lagging far behind the Euro Stoxx, after adjusting for exchange rates.

And what about the United States? We have increased our 2017 growth forecast slightly from 2.0% to 2.2%. This adjustment has little to do with policies, as the euphoria and disappointment over Trump likely balance out. One modestly beneficial exception may be deregulation. Whether the new administration will be able to deliver on tax cuts remains to be seen. We still expect some tax relief for U.S. companies, but have already substantially pared down our expectations. This is reflected in our inflation, interest-rate and foreign-exchange forecasts, which critically depend on the size of the tax package.

Despite all of the political uncertainties, it should be noted that the global economy has performed surprisingly well. We recently increased our 2017 forecast from 3.5% to 3.7%. There are new signs of blossoming, even this late in the economic cycle. This may provide further support for markets in the year ahead, alongside cautious central banks and the inflation figures that we expect to remain moderate.

" The global economy has performed better than expected in 2017. Political developments, however, appear rather mixed, notably in the United States. "

Stefan Kreuzkamp, Chief Investment Officer

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