Storm clouds on horizon for US economy

Most of the major world economies may have lost considerable momentum over the past year, but the US economy has continued to power ahead.

Storm clouds on horizon for US economy

Most of the major world economies may have lost considerable momentum over the past year, but the US economy has continued to power ahead.

GDP growth in the US is estimated at close to 3% last year, up from 2.2% in 2017 and 1.6% in 2016.

By contrast, the UK economy grew by 1.4% last year, its weakest rate of expansion since 2012.

Growth in the eurozone slowed to 1.8%, the lowest rate since 2014.

The Japanese economy also saw a marked slowdown in growth last year, with GDP rising by just 0.7%, down from 1.9% in 2017.

The prospects for all three economies in 2019 are not favourable.

Growth in the UK and eurozone is likely to be little more than 1% and is expected to remain below 1% in Japan.

A key question is: 'Can the US economy continue to buck the trend?'

The federal government shutdown means we have not got complete US data yet for the final quarter of last year, but the indications are that the economy continued to perform well.

Overall, it is estimated that GDP rose by around 0.6% in the quarter, in marked contrast to the paltry rate of 0.2% recorded in both the UK and eurozone.

Survey data for January suggest that the US economy is continuing to perform well.

The composite purchasing managers index - or PMI - a good measure of economic activity, was broadly unchanged in the month.

However, consumer sentiment did fall sharply, partly due to the government shutdown and December’s financial market volatility, but it has recovered in February.

Labour market data remain very positive.

Non-farm payrolls rose by a much stronger than expected 304,000 in January.

Indeed, private sector payrolls rose by an average of 234,000 in the three months to January, the best performance in three years.

Wage growth is also picking up, with the year-on-year growth rate of average hourly earnings accelerating to 3.3% in the latest three months.

Overall, the near-term outlook for the US economy remains positive, as suggested by the rise of over 10% in US stock markets since the start of the year.

While the boost from last year’s tax cuts is starting to fade, the strong labour market continues to support the key consumer sector of the economy.

Government spending is also continuing to rise strongly, especially on defence.

Meanwhile, with interest rates still quite low and the Federal Reserve turning cautious on more hikes, monetary policy remains supportive of growth.

The federal government shutdown and recent spell of severe weather will dampen growth somewhat in the first quarter, but activity should pick up again in the spring.

However, in the medium term there are risks facing the US economy.

The growing twin deficits are a source of worry, especially the rapidly rising budget deficit.

Fiscal policy will need to be tighter in the future.

The lagged effects from the Fed’s interest rate hikes could also act as a headwind to activity.

Housing market activity already looks to have peaked.

The slowdown in the global economy is another concern.

Overall, while growth is expected to remain strong in the near-term, the downside risks facing the US economy are mounting.

As a result, it could slow quite noticeably in 2020 and beyond.

Oliver Mangan is chief economist at AIB

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Wednesday, October 27, 2021

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