Markets have rushed into concluding that the U.S. economy is poised for more growth on an expansionary budget policy, after Donald Trump won the presidential election last week, European Central Bank Vice President Vitor Constancio said Monday.
Optimism is being driven by the insight that fiscal stimulus at this stage of economic cycle can break the liquidity trap that has hampered growth in the advanced economies, the policymaker said in a speech at the Euro Finance Week event in Frankfurt.
Constancio pointed out that several commentators have hasted in concluding that the recent geo-political developments will have, after all, economic benefits.
"This may be the case in the short-term but the real negative effects of heightened uncertainty can come later," he said.
"We should be cautious in drawing hasty, positive conclusions from those market developments because they may not necessarily indicate that the world economy will have an accelerating recovery with higher growth."
"So far, those developments point to a U.S. rise in economic growth, but in the context of an "America first" policy," he added.
The possibility of rising protectionism, capital outflows and exchange rate depreciation in emerging market economies, and market concerns and internal problems in Europe could contribute to mitigate or even reverse the international spillovers from an expansionary fiscal policy in the U.S., Constancio said.
The euro area recovery is continuing its moderate but steady pace, and recently being driven by domestic demand, the ECB rate-setter said. Further, the recovery has proved resilient to a series of adverse shocks such as a China slowdown, acute stock-market slowdown earlier in the year and the uncertainty from 'Brexit', Constancio pointed out.
The ECB Staff has forecast 1.7 percent growth for this year and 1.6 percent for next year. Inflation has been projected to rise to 1.2 percent next year and climb further to 1.6 percent in 2018.
"However, considerable risks and uncertainties to financial stability remain," Constancio said.
The main risk is related to a possible worldwide reversal of risk premia that could induce contagion and affect asset prices, he warned.
"We have just started to see this in the bond market and this is exacerbated by the present heightened political uncertainty in advanced economies," the policymaker said.
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