US Macro Outlook for the Next 12 Months and Dollar Implications
Combining the new information over the summer with our global growth forecasts, it appears the most likely scenario now is one of ‘pro-cyclical decoupling’ of the US economy from the rest of the world.
As the table shows, we expect the US economy to grow substantially below trend over the next 12 months and in 2011 as a whole. This expected weakness remains directly linked to a number of persistent structural imbalances, which in some cases have started to deteriorate again. In particular, the following points have caught our attention:
- Survey data points to sluggish growth. The latest ISM readings for the manufacturing and nonmanufacturing sector point to continued sluggishness in the respective sectors. Although the latest headline reading in the manufacturing ISM showed marginal improvements, the order-inventory gap and other forward-looking components suggest further sequential slowing lies ahead.
- Persistent high unemployment is a particular feature of the current US problems, hinting at a large output gap. It reflects the need to reallocate considerable economic resources from artificially inflated sectors (in particular, real-estate-related). A shift of a sizeable part of the labour force from one sector to another takes time.
- The US household savings rate remains too low relative to the US’s own long-run history, international comparisons and the demographic situation. As savings rise, the unusually high share of consumption in GDP will likely decline.
- Import demand has picked up strongly during the inventory cycle, highlighting just how little the US economy has rebalanced and how much US demand seems to depend on foreign supply. Relocating production to the US is a slow process.
- Rate differentials have moved sharply against the USD as markets increasingly priced in our own sluggish US growth scenario. Our expectations of renewed Quantitative Easing in the US, following the recent ‘baby step’ of extending the mortgage program, suggest rate differentials are unlikely to boost the USD anytime soon. On the other hand, stronger growth outside the US, in a positive decoupling scenario, would likely weaken the US via a corresponding shift in rated differentials.
- Finally, fiscal consolidation needs in the US are among the most important globally and on many measures, including from the IMF, the adjustment need in the US is comparable to that in the UK, Spain and Greece. Tighter fiscal policy will add to the outlook for slowing final demand in the US, a potentially USDnegative development.
