US financial crisis still casts a long shadow - Westpac

Richard Franulovich, Research Analyst at Westpac, explains that it's almost a decade since the US financial crisis and growth is still tracking historical analogues pointing to sub-par growth and while Trump is a potential game-changer, this week's US House vote on a new health care bill will be a key test.

Key Quotes

“US growth and interest rates in the decade since the financial crisis vis-à-vis other economies that experienced similar financial crises.”

“It is now almost a decade since the US financial crisis. Historical analogues from other financial crisis economies suggest that at this point there is still no discernible improvement in trend growth. US growth is tracking right about where the post-crisis historical record suggests it should be, though interest rates are higher.”

“Of course President Trump’s policy agenda - significant tax cuts, tax reforms, a big lift in infrastructure spending and deregulation – are potential “game changers” that could see the US defy the trend of extended weak post-crisis growth, especially if the focus is on boosting productivity and supply side potential.”

“But, any signs that the Trump administration cannot achieve some of these core policy goals could undermine animal spirits and the still weak underlying post-crisis “soft growth” trend could reassert itself.”

“The US House is set to vote on a new health care bill to repeal and replace much of Obamacare this Thursday. Any signs that healthcare reform is running into stumbling blocks could raise investor concerns that tax reform will also run into similar problems. This week’s vote will offer a test of the party’s cohesion ahead of other equally controversial items among the Republican party such as taxes and infrastructure. Even with a healthy majority in the House passage of healthcare reform is not assured. There are procedural reasons why delays to health care will lead to delays on taxes too.”

“The Republican party is using a special budget rule known as "budget reconciliation" to replace Obamacare and tax reform. This procedure makes it easier to pass budget related legislation because it gets around the need for a super majority 60 votes in the Senate – just a simple majority is needed. Without this approach its highly doubtful these big ticket items will pass the Senate given the Republican Party’s wafer thin majority in the Senate. But, along with the advantages of this special rule come key restrictions. Just one reconciliation is permitted each year and Republican’s chose the 2017 reconciliation bill to focus on health care, leaving the 2018 reconciliation for taxes.”

“The new health care bill provides fiscal space for tax cuts too and in that sense procedurally must be dealt with first. Any signs that a new health care bill is struggling to pass in Congress will raise doubts about the timeline and likelihood of other major policy items that markets really care about, such as taxes and infrastructure.”