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A key point for financial scenarios: Will the United States be able to keep foreign capital when its economy slows down?
US growth will inevitably slow down as a result of the return to full employment. In 2019 in the United States, we should therefore expect lower growth, a significant fiscal deficit and, since this fiscal deficit is implemented at full employment, a large external deficit. What will then happen with the foreign capital? It is now attracted to the United States , flowing in to bonds ( due to the rise in interest rates) and equities ( due to the tax reform and the sharp increase in corporate earnings). But if international capital is no longer attracted to the United States in 2019 because of the slowdown in US growth and because , as a result, the Federal Reserve’s rate hikes are small er than expected , and also because the effects of the tax reform, seen in 2018, disappear , then there will be a major problem . The twin deficits (fiscal, external) will become difficult to finance, normally lead ing to higher long-term interest rates, a depreciation of the dollar and an increasingly weak equity market.
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Natixis
Based across the world’s leading financial centers, Natixis CIB Research offers an integrated view of the markets. The team provides support to inform Natixis clients’ investment and hedging decisions across all asset classes.
Patrick Artus
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