Uncle Sam gets gold star for growth

The past week saw news that the Japanese economy had slipped back into recession yet again, with GDP declining in both the second and third quarters of the year.

Combined with the sluggishness of the eurozone economy, it means that two of the main blocs of the world economy remain in a very weak state, some five years after the end of the so-called Great Recession of 2008-09.

By contrast, the US economy is continuing to motor ahead.

GDP has risen by between 0.9% and 1.1% in four of the last five quarters.

Employment is expanding by more than 200,000 every month.

The unemployment rate, which peaked at 10% back in 2010, now stands at 5.8%.

The jobless rate stood at 7.2% in October 2013.

Thus, there has been a particuarly marked decline in unemployment in the past year as the pace of job creation picked up.

The US economy benefitted from an early and aggressive easing of monetary policy.

US interest rates were cut to 0% in 2009 and have been left there ever since.

Furthermore, the Federal Reserve has engaged in very substantial quantitative easing in recent years.

Contrast this to the eurozone where the ECB has only recently reduced interest rates to zero and started to pursue a very modest quantitative easing programme.

Indeed, the ECB hiked rates on two occasions in 2011. Fiscal policy has also been far less restrictive in the US.

The general government budget deficit is likely to be around 5% of GDP this year, almost double the level in the eurozone.

The main focus of policy in the US has been to get the economy moving again.

By contrast, the focus in the eurozone has been on getting budget deficits back down below 3% of GDP.

The impact of two differing policy stances is most clearly visible in the labour market.

The unemployment rates in the US and eurozone both stood at 10% back in 2010.

Today, the eurozone jobless rate is 11.5%, way above the 5.8% rate of the US.

The expectation is that the US economy will continue to perform strongly. US GDP growth is forecast by many to exceed 3% in both 2015 and 2016.

Monetary policy will remain supportive of growth. Interest rates are expected to rise in the next couple of years.

However, the Federal Reserve has stressed that rate increases will be both moderate and gradual and interest rates will remain low.

Meanwhile, fiscal policy will turn more stimulatory with modest increases expected in government spending.

The main engine of growth, though, is expected to remain consumer spending and investment.

Wage growth is at last beginning to pick up in the US in response to the improving labour market conditions.

Meanwhile, real spending power should receive a major boost from the recent sharp drop in energy costs.

Combined with robust employment growth, this should form the basis for strong growth in consumer spending over the next couple of years.

A marked fall in household indebtedness as well as rising equity and home prices should also support consumer spending.

Business investment should benefit from improved financing conditions and strong corporate balance sheets and profits levels, as well as solid growth in demand that will require firms to add to their capital stock.

The housing market still has not yet returned to normal in terms of building activity and household formation rates.

Housing is expected to continue its recovery in the next couple of years, as should the broader construction sector.

There are some doubts as to whether the US can sustain its stellar performance against a backdrop of a weak global economy.

There are also concerns about weak labour force growth as the population ages.

All the indications are, though, that the US economy can continue to perform strongly in the next couple of years.

Oliver Mangan is chief economist at AIB

Oliver Mangan


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