Trump Lucky to Inherit Healthier Banking System, Greenwood Says

(Bloomberg) -- Donald Trump will enter the White House with the U.S. banking system in far better shape than it was for Barack Obama’s arrival eight years ago, according to Invesco chief economist John Greenwood.

With Trump’s inauguration just two weeks away, the U.S. business cycle is in line for several years of expansion as bank lending is growing and activity has normalized, reducing the need for the Federal Reserve to create credit as it did under quantitative easing, Greenwood said Thursday at a news conference in Hong Kong.

“Mr Trump is extremely lucky: He inherits an environment where the banks have been repaired, they’ve been recapitalized, there’s new liquidity in the economy, consumer finances are in good shape, business is strong and inflation is low,” London-based Greenwood said. “All of that is in marked contrast to the inheritance of Mr. Obama in 2009.”

While commercial bank lending in the U.S. contracted by 14 percent cumulatively from 2008 to 2011, it is now growing at around 8 percent, said Greenwood. This is also in dramatic contrast to Europe, where banks haven’t expanded their assets and liabilities since June 2008, he said, adding that Japan is similarly stagnated.

“Whereas the U.S. is on a steady track toward recovery, we cannot say the same for Europe and Japan, at least with the same confidence,” Greenwood said. “As far as global financial markets are concerned, they will primarily be driven by what happens in the United States.”

The U.S., according to Greenwood, has moved into a phase of interest-rate normalization, not tightening. The current “bubble” in the financial market stems from low interest rates causing higher prices of long-duration assets like bonds and property, he said. The threat of that bubble bursting will be avoided if central banks can raise rates gradually and growth in money and credit continues.

“There is no reason why the economy shouldn’t survive and continue to grow through this period of rising rates,” Greenwood said. He expects the Fed to raise interest rates two or three times in 2017.

To contact the reporter on this story: Will Davies in Hong Kong at wdavies13@bloomberg.net. To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Jeff Sutherland