US policy to decide EM fate; world GDP seen @3.5%: BofAML

In the coming year fiscal stimulus in US and other countries will aid the world gross domestic product (GDP) growth and the global average is likely to be around 3.5-4 percent, says Ethan Harris of BofA ML.

Speaking to CNBC-TV18 Harris outlined his views on how the global economy will fare in 2017.

He said that trade protectionism will remain a threat next year and the policy mix of US under President-elect Donald Trump will decide the course for emerging markets in 2017.

For India, he said that demonetisation will slow the country's GDP growth and expects it to be around 6-7 percent in 2017.Below is the verbatim transcript of Ethan Harris's interview to Latha Venkatesh.Q: How do you expect the global economy to pan out in 2017 will it be better-off or worse-off than 2016?A: In our calculation global gross domestic product (GDP), the typical growth rate is about 3-3.5 percent and that is kind of the area we have been stuck in over the last six years or so but there are reasons to expect a little bit better growth in the next two years, something more in the 3.5-4 percent range. The main story here is fiscal stimulus coming in the United States and in number of other countries and that should bump us a little bit above this kind of slow, steady recovery we have been in for the last six years. Q: Do you expect that US economy will fire away that it will grow much faster than it grew in 2016? A: I think that the US will start off in a bit moderate trend at the beginning of the year as people digest the new policies of the President, but the second half of the year with tax cuts coming in, with some spending including on infrastructure, we would expect growth to pick up to about 2.5 percent and we think that continues into 2018. So it will be a period of better growth but there are limits to how fast the US can grow. We are already pretty much at full employment right now and so if the Trump administration pushes too hard on the accelerator then the Fed will be forced to hit the brakes hard. So, I do not think we should be expecting a boom in the United States. I think just a little bit better growth. Q: More than the pace of growth will there will be fear that the US growth will come at the expense of other countries like say China or Mexico or other emerging markets?A: The danger in the next year is protectionism. If the new administration does impose tariffs or the kinds of restrains on trade then US growth would come at the expense of other countries. We expect only small actions in those regard, so we think that the main effect of the new administration will be stronger US demand, a stronger currency and so at least some of the US strength should flow overseas and help support global growth. So the question is - do we get the growth positive story mainly which is a fiscal policy and a deregulation story in the United States or do we get some kind of very aggressive trade protectionism. We are looking for more of the good growth story coming from deregulation and fiscal policy. Q: What about the dollar already at 103 plus do you see more strength in the dollar in 2017? A: The dollar's big move has happened. The market is anticipating fiscal stimulus in United States and so we have had a fairly sharp move since the election. The dollar overall up more than 4 percent on average and most of the moves has already happened, but I do believe that as we see implementation of fiscal easing in United States, the dollar will continue to creep higher. Therefore, what that does of course is it tends to constrain some of the strength of the US economy, but does help the US' trading partners. So I do think the big move has already happened as the market anticipates the policy changes that are coming. Q: The dollar obviously will have an impact on commodities since you are expecting a modest improvement in US growth as well would you say commodities uptick that we saw in 2016 continuous in 2017, crude, metals?A: Our view is that commodities do have a slightly upward bias going forward, not a dramatic improvement but tendency to move higher. We will probably be seeing little bit better global growth. We have also seen some of the excess supply come out of the market with the Organisation of the Petroleum Exporting Countries (OPEC) agreement and with a big pullback in the US oil production. If you look broadly across commodities, they seem to have moved into better balance. However, as long as the growth does pick up, we should see a modest pickup in commodities along with GDP recovery. Latha: Pick up in commodities now what will that mean for the US Fed? Will that mean inflation and so it will go through with it’s promised three rate hikes in 2017?A: I do not think the Fed will do three rate hikes next year. I think they will probably do more like one or two and the number of hikes they will do will depend on whether we have a smooth sailing for the economy. What we have seen in the recent years is that the Fed forecast multiple hikes each year, but then when the economy hits speed bumps or when we have difficulties in financial markets, the Fed postpones. So I would only expect three hikes in 2017, if it is smooth sailing; if we do not get any bumpiness on the road. However, I do believe, as we go further forward into 2018 and 2019, the Fed will accelerate because by that point we think they will be achieving near 2 percent inflation target and we think that they will be much more confident about the recovery once the fiscal policies implemented and its adding support to growth. So over a time some acceleration and Fed rate hike seems likely to us. Q: How do you expect smart money to move in 2017? In past two months it has been moving away from emerging markets assets and into developed economy assets especially US assets does that continue in 2017? A: One of the key things looking forward is what is the policy mix in the United States, if we get a situation where we have a lot of protectionist measures and the US is growing at the expense of another countries and this is going to be a bad environment for emerging markets but if we have a more healthy kind of fiscal policy and regulation driven growth, there will be some pressure in emerging markets because there is going to be some ongoing move higher in interest rates in the United States. It's something that probably the emerging markets can live with and do reasonably well. So, we are going to learn a lot in the first quarter. We are going to find out a lot about how campaign rhetoric is translated into actual policy changes and so at this stage, we are cautiously optimistic on a positive growth outcome which is positive for emerging markets as well as the US.Q: Do you think India will come out looking good from this currency change that we are going through will 2017 see faster growth than 2016 in India? A: We are looking for a moderate growth by Indian standards with the new version of GDP growing between 6 percent and 7 percent in 2017. We think that demonetisation programme, the black money campaign, will slow growth certainly in the end of this year and so does give a weak start to the New Year. However, India should be supported by the general global backdrop and by other central bank policies, so a moderate growth by Indian standards in 2017.Q: Well you spoke of speed bumps so let me come to major disruptions in the global economy. Do you think that there can be such disruptions remember the previous December when the Fed hiked rates there were fears of Chinese devaluation and near recession like fears in January of 2016, can there be any of these ultra destabilising moves in 2017?A: My view is that the Fed is not really concerned for 2017, they are still going very slowly, they are going to pullback at any moment if there is disruption in the markets. So, I don’t feel the Fed is the source of that much market volatility. The real question is come from the other side of Washington is whether we have a major trade protectionist measures that is the real source of worry. At this stage, we really don’t know how far things will go and we if go around the world the US isn’t the only nation where there is some pulling back against free trade and open economies receiving the same thing in Europe. So, over the next several years I would say that populism and the pressure to undue free trade and to block free movement of the workers those of things that I see is the biggest risk.