US rate hikes to rein in growth

By Oliver Mangan

The US economy grew at an annualised rate of 2.3% in the first quarter of the year, down from 2.9% in the final quarter of 2017.

Overall, though, the economy has grown at a steady pace of between 2.3% and 3.2% for the past four quarters.

Despite the slowdown, the year-on-year rate of growth picked up to 2.9%, its strongest level since mid-2015.

The main reason for the more modest growth in the first-quarter was slower consumer spending.

In terms of the other main GDP components, net trade provided a modest boost to growth, while government spending and business investment also made positive contributions.

Overall, the US economy remains in good shape. Survey data for April suggest that the economy continues to grow at a solid pace.

Labour-market data have also remained strong in the early part of 2018. Employment, as measured by non-farm payrolls, saw average monthly growth of 200,000 in the first four months of the year. Unemployment fell to 3.9% in April, an 18-year low.

Wage-growth has remained modest, despite the tight labour market. Growth in average hourly earnings has held in the 2.3% to 2.8% range since mid-2015, coming in at 2.6% in April.

Meantime, the US Federal Reserve’s preferred core inflation-rate measure rose by 1.9% in March, a one-year high.

There are some indications that price pressures are increasing, implying that inflation could rise slightly above the Fed’s 2% target in the coming months.

Overall, the outlook for the US economy remains positive and, despite recent interest-rate rises, US monetary policy remains accommodative.

At the same time, the raft of tax cuts passed by Congress at the end of last year will provide a fillip to growth in the next couple of years.

The latest IMF forecasts are for strong US growth of 2.9% in 2018, and 2.7% in 2019. However, there are also some risks to the economy. Ongoing uncertainty related to the Trump administration’s protectionist trade policies is a concern.

The fiscal stimulus will likely boost demand for imports, further widening the US trade deficit. It will also increase the size of the budget deficit and, thus, add to upward pressure on US Treasury yields, increasing borrowing costs.

Indeed, there are concerns that the US economy could slow sharply after 2019, as the impact of the fiscal stimulus fades and higher interest rates start to weigh on the pace of activity.

For now, though, continuing solid growth, very low unemployment, and some pick-up in inflation will keep the Fed on a steady rate hiking path.

The next interest rate increase is expected in June, with further hikes to follow later this year and in 2019.

Oliver Mangan is chief economist, AIB

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