US: Growth likely slowed to less than 2% in Q1 - NBF

Krishen Rangasamy, analyst at National Bank of Canada, points out that US economic growth is slated to soften somewhat in Q1 but an acceleration can be expected in subsequent quarters amidst strong fundamentals.

Key Quotes:

“While U.S. GDP growth is slated to soften somewhat in Q1, an acceleration can be expected in subsequent quarters amidst strong fundamentals. Consumption spending remains well supported by a buoyant labour market, federal tax cuts on personal income, low interest rates, and easy access to credit. Business investment is poised to benefit from corporate tax cuts and a positive economic outlook, while fiscal stimulus will provide an extra boost to an economy that arguably doesn’t need it. One major question mark, however, is Washington’s apparent tilt towards protectionist policies which not only threatens to hurt some workers in the export sector as trade partners impose retaliatory measures, but could also tax consumers via higher prices for imported goods.”

“After surprising on the upside last year, the U.S. economy seems to have taken a breather in the first quarter of 2018. Monthly reports to date, including personal consumption spending and industrial production, suggest the pace of growth likely slowed to less than 2% annualized in Q1.”

“But the U.S. outlook is not all rosy. The above-mentioned strengths could potentially be stunted by a deteriorating fiscal situation. The budget deficit, which is now projected to soar next year past US$1 trillion (more than 5% of GDP), will have to be addressed down the road via growthbusting spending cuts and tax hikes.”

“If Congress fails to restore fiscal discipline, Treasury yields will rise more than would otherwise be the case and hence tighten financial conditions. As we’ve seen earlier this year, long bond yields could rise even in the absence of inflation.”

“Also of concern is the growing threat of protectionism. Bent on boosting Republican poll numbers in rust belt states ahead of November’s mid-term elections, the White House announced a string of tariffs in March on imported goods. That not only threatens to hurt some workers in the export sector as trade partners impose retaliatory measures, but could also tax consumers via higher prices for imported goods. In the meantime, the trade deficit, with which the White House is seemingly obsessed, is unlikely to improve all that much because of low U.S. savings.”

“If history is any guide, the only sure way to narrow America’s trade deficit is a sharp economic slowdown, which tends to boost savings and lower consumption and investment, a scenario that can’t be ruled out entirely especially if the current trade spat deteriorates into a full blown global trade war. In other words, the White House’s stated objectives of a sustained 3-4% real GDP growth and a smaller trade deficit do not seem to be compatible.”