Brendalee Scott-Novak,

2016 heralded unprecedented shifts in our global political landscape. The watershed moment, it can be argued, was Britain’s vote to abandon the 23-year-old European Union. As news reports of this historic vote surfaced, shock waves ricocheted across global financial markets, sending all the major indices into tailspins.

This unprecedented move by the euro area’s second-largest economy drove down the British pound more than 18 percent, caused the FTSE 100 Index to plunge more than 15 percent and pushed down GDP growth estimates to merely 1.4 percent for 2017.

Analogous to the shock of a Brexit reality was the striking defeat of Democrat Hillary Rodham Clinton in the U.S. presidential election, giving the presidency of the world’s super power to the populist, anti-establishment candidate Donald Trump.

Prior to the election, forecasts of a Trump victory suggested a sharp selloff in markets similar to the aftermath of Brexit. While equity markets did experience a brief selloff at the opening, as the initial shock wore off, investors began dissecting the reality of Trump’s policy initiatives. U.S. equity markets then rose in spectacular fashion on speculation that the president-elect will introduce fiscal stimulus, boost infrastructure spending and tackle deregulation, boosting the economy and spurring inflation. The sanguine mood in markets drove the Dow Jones Industrial average to new highs inching closer to a record 20,000. Fixed income markets, on the other hand, spun into a nosedive, pushing rates higher across the entire curve. The move dealt a crushing blow to bond holders, driving 10-year U.S. Treasuries up more than 94 basis points.

In the months leading up to the election, analysts and the media alike touted a Trump victory and Brexit as two sides of the same coin. But what exactly caused the euphoria in U.S. equity markets following Trump’s victory versus the flight to safety and free fall in British markets from a Brexit vote?

Admittedly, the referendum in Britain was the first in the sequence of political shake-ups our modern world has experienced. Italy’s vote to reject the referendum on constitutional reform and subsequent resignation of Prime Minister Matteo Renzi (increasing the probability for early elections this year) has left many concerned about the wave of populist sentiments and its potential impact on Europe.

While most of Europe’s populist parties are hoping to ride the wave of revolution taking place, the recent defeat of far-right anti-immigration Freedom Party’s Norbert Hofer in Austria means a sweeping move by anti-establishment ideologies is not a foregone conclusion. With elections in the Netherlands in March, France in May, and Germany in the fall, all eyes will be on the euro area as they navigate a new year riddled with political uncertainty.

As we usher in 2017, we are left to wonder if the shifting political dynamics and market euphoria around a Trump presidency have been miscalculated.

Adopting President-elect Trump’s policy initiatives in part or the whole can easily swing the pendulum from a country operating at or near the natural rate of full employment into a deep rooted recession. A large surge in activity when the economy is close to its full employment rate could bolster wage pressures, the most significant contributor to inflation. Current initiatives by states to increase the minimum wage, coupled with anti-immigration policies of the president-elect — specifically around the deportation of illegal immigrants — could further reduce the labor force, making the environment ripe for additional wage pressures.

The levying of steep tariffs on goods produced abroad by U.S. corporations, a major campaign theme of the president-elect, will make U.S. corporations less competitive, whilst driving imports of cheaper alternatives higher. A rising trade deficit and debt burden from large-scale fiscal stimulus and infrastructure spending will undoubtedly add to inflationary pressures, bringing the integrity of the U.S. balance sheet into question.

While Trump’s victory was met with much jubilation in the streets, the longer-term impact of his combined policies, if passed by Congress, may not bode so well for the U.S. economy. Paradoxically, the U.K.’s decision to exit the EU has resulted in short-term pain, but it could effectively serve to undergird an even stronger economy in the not so distant future.

Statistics and Data Source: Bloomberg LP., BCA Research, Federal Reserve

Disclaimer: The views expressed are the opinions of the writer and while believed reliable may differ from the views of Butterfield Bank (Cayman) Ltd. The bank accepts no liability for errors or actions taken on the basis of this information.