Macroscope | The US economy still leads the pack, but not for long as spectre of trade war with China recedes
The US economy started the year with a bang but growth is likely to flatten out over the year. Meanwhile, Asia is looking up as a US-China trade deal appears imminent. 2018’s economic divergence is unlikely to continue
This time last year, economic divergence characterised the global landscape. The world’s economies and central banks looked to be on very different paths, especially when it came to the US versus the rest of the world. This year, economic divergence was meant to fade, along with the idea that the US economy is exceptional.
So how come the US still looks to be out in front while the rest of the world gets back up on shaky legs?
Given that the US economy had been growing at an average annualised rate of 2.25 per cent over the past decade, the latest figure of 3.2 per cent is a good number. But what was behind this number was not so good.
Amid the subdued outlook in the latter part of 2018, companies allowed inventories to dwindle with little incentive to restock. That reversed in the first quarter and the rebuilding of inventories accounted for nearly a quarter of the headline growth figure. Trade was the other big contributor, despite talk of a trade war.
However, trade and inventories are aspects of growth that wax and wane. A stock rebuild or increase in exports in one quarter can easily become a drag in the next. Chances are, US trade numbers will deteriorate for the next quarter and inventories will grow much more slowly. The key drivers of US growth this year are underlying domestic demand and consumption, and as they decelerate, the economy is likely to flatline at 2 per cent growth.