Written By: Richard Koch – Forex Focus
A preview of some of the major economic announcements and the outlook for 2018
The United States was among the best-performing economies globally in 2017, not only leading most of the G-8 countries in terms of economic growth last year, but it is also the frontrunner as analysts look forward to the country’s economy expanding at a faster rate in the year ahead. All of this is against the backdrop of a new US president taking charge and some of the most controversial political announcements being made, some of them for the first time in the history of the country, leading to massive outrage even from the international community. Also, some of the provocative statements threaten to create a rift and disrupt decades of solid cooperation between the US and some of the most powerful countries on the other side.
A quick review of some of the significant economic data in 2017:
Beginning with the most sought-after economic data, the US economy gathered momentum in the second half of 2017 with gross domestic product (GDP) growth rising sharply to 3.1 percent and 3.2 percent in the second and third quarters of 2017 respectively. This followed 1.2 percent growth in first quarter 2017. In addition, third-quarter GDP growth rose to the highest since the first quarter of 2015 on the back of a solid upsurge in gross private domestic investment, government-consumption expenditure and gross investment. For the year, GDP growth averaged 2.5 percent, and with the fourth-quarter growth numbers due later this month, the median expectations of analysts are for 3 percent growth in the last quarter, which would drive the annual growth figures to around 2.7 percent, higher than the annual averages of 2.0 and 1.85 percent reported in 2015 and 2016 respectively.
US factory growth as reported by the Institute for Supply Management averaged 57.6 in 2017, after rising to 59.7 in December. The manufacturing index rose to a high of 60.8 in September, with the year’s lows coming in at 56.0 in January. The sector has been expanding for the 16th consecutive month as new orders, production and hiring have continued to grow, while supplier deliveries continued to remain sluggish.
Likewise, the non-manufacturing sector, too, averaged about 57.0 last year, rising for the 96th consecutive month, led by business activity and new orders, which rose for the 101st month in succession. Employment activity, on the other hand, increased for the 46th consecutive month in December, with inventories rising for the ninth straight month. Supplier deliveries were the only laggard in the overall data, with the index slipping for the 24th month in a row.
On the trade front, the US international trade deficit for goods and services rose to a record $513 billion at the end of November 2017 compared to $460 billion during a corresponding period in 2016, according to the US Census Bureau. While the December numbers are yet to be announced, going by the earlier readings, the US trade deficit could rise to top the $550 billion mark. The negative trade numbers were largely on account of rising importation of goods, which expanded to $2.1 trillion in comparison with a $1.42 trillion rise in the export figures. The deficit in the services sector was, however, more or less muted at $4.9 billion at the end of November from $4.62 billion during a similar period in 2016. Coming to country-specific numbers, the US trade deficit was largely on account of China, with an overall shortfall of around $344 billion from $319 billion in 2016, and the European Union, for which the deficit numbers rose to $156 billion last year from $134 billion in 2016.
Monthly retail sales increased in nine out of 12 months in 2017, with the largest month-on-month retail trade numbers reported in September, at 2 percent. For the year, retail trade advanced to 4.2 percent from 3.2 percent in 2016.
Outlook for 2018:
In its last monetary policy meeting in December, the US Federal Reserve (the Fed) raised key rates by 0.25 percentage points , following it up with dovish statements even as Chair Janet Yellen is set to demit office in a couple of months. The Fed outlined its economic projections, with expectations of a faster growth trajectory coupled with a rise in inflation and fall in the unemployment rate.
According to statements from the president of the New York Federal Reserve, William Dudley, earlier this month, the outlook for the US economy is “reasonably bright” and is likely to expand at an above-trend pace this year, leading to tightening of the labour market and an eventual rise in wage growth, which has not kept pace with consumer inflation. He, however, cautioned that the longer-term outlook could be challenging in the aftermath of tax cuts, which are unnecessary in the current economic scenario. The most probable outcome of such cuts will be the economy expanding rapidly along with a rise in borrowing costs as the Fed moves to curb inflation by raising interest rates at a quicker pace. The tax cuts are also likely to raise the risks of a hard landing, with the economy falling into depression in the longer term.
The US economy is likely to expand anywhere between 2.5 and 2.8 percent in 2018, a moderate increase from last year. Although President Donald Trump promised a growth rate of 4 percent, it is very unlikely that the country will see a sudden surge this year, in spite of the expected tax breaks. The unemployment rate, which is currently hovering around 4.0 percent, could see a further fall to 3.8-3.9 percent in the months ahead. Consumer inflation, which was around 1.7 percent in 2017, could rise to 2 percent in the second half of the year on the back of economic expansion and stable oil prices. Growth in the manufacturing sector could swell to 2.8-3.0 percent this year before slowing down in the next couple of years.
The Fed has already signalled three rate hikes this year, which could lead to a correction in the already overheated stock markets after the massive liquidity-driven rally in the last couple of years. 2018 could, however, be a good time to invest in commodities, especially the likes of precious metals and oil, which have hardly moved in the last few years as investors looked to profit from investments in equities and fixed-income assets on the back of excess liquidity and low interest rates.