World Economy Is Still Dependent On The USA

by: RadaEcoWatch

Summary

The US economy is the most promising in the developed world as the Euro zone could see a deceleration of GDP growth and Japan is still stuck in low inflation.

Confidence indices released over the last few weeks signaled that the favorable trend of the US economy may also continue in early 2017;

According to latest Bloomberg consensus estimate, US GDP should expand by 2.3% in 2017, up from 1.6% in 2016;

The only source of concern for the US economy has come from the increase of initial jobless claims from a low of 233k in mid-November to 275k;

With inflation close to 2%, rising government bond yields and strengthening Dollar, we think that the FED could raise rates twice in 2017.

At the beginning of 2017, the world economic outlook will greatly depend on the USA. Indeed, in our view the US economy is the most promising in the developed world as the eurozone could see a deceleration of GDP growth (from 1.6% in 2016 to 1.4% in 2017 according to Bloomberg consensus estimate) and Japan is still stuck in low inflation. The outlook of emerging markets is also uncertain. Despite the expected economic rebound in Russia and Brazil - both are projected to return to a positive GDP growth in 2017 according to IMF estimates - the Chinese outlook is a source of concern for the softening of its housing market and for its high level of debt.

The latest economic data published in the US have indicated that economic growth remains very solid. For example, Q3 GDP grew by 3.5%, the highest since Q3 '14. In November, the unemployment rate fell to 4.6%, the lowest since May 2007.

Confidence indices released over the last few weeks signaled that the favorable trend of the US economy may also continue in early 2017:

1) The ISM manufacturing business confidence index rose from 51.9 to 53.2. According to the ISM institute estimates, this figure is in line with a 3.2% GDP growth. The ISM will also be the first relevant economic data to be released in 2017 (Tuesday, January 3rd). According to consensus estimates, the index should rise to 53.7, signaling a continuation of the recent positive trend in Q1 '17;

2) With 70% of the US economy dependent on consumer spending, the surge of the Conference Board consumer confidence index in December to the highest since 2001 was the most positive indication to come out lately. It is a sign that consumption should continue to grow at a solid pace in early 2017, sustaining the whole economy;

3) Finally, the NAHB housing market index rose to the highest level since June 2005, anticipating a further improvement of the sector despite the decline of housing starts in November.

These data have fueled optimism among economists, who expect US economic growth to accelerate in 2017. According to the latest Bloomberg consensus estimate, US GDP should expand by 2.3% in 2017, up from 1.6% in 2016. Above all, the possibilities that the US economy would enter recession in 2017 seem very low. For example, forecast models based on the yield curve estimate that the chances of recession are equal to 5.4%.

The only source of concern for the US economy has come from the increase of initial jobless claims from a low of 233k in mid-November to 275k. Despite remaining well below the 300k threshold, it is a sign that labor market trends could have deteriorated in late-2016.

In this scenario, and with CPI expected to remain close to 2% in the foreseeable future, we think the Fed will raise rates gradually. Indeed, the recent increase of government bond yields and the strength of the US Dollar have already had a restrictive effect on the economy. For this reason we think that the Fed could actually raise rates twice in 2017, lower than its latest projection of 3 increases.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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