RaboResearch - Economic Research

Country Report United States of America

Country Report


Flag United States

The US has fared well economically on the back of successful internal and external rebalancing. Moreover, it has also reduced its oil dependence but it remains vulnerable to political gridlock at the federal level in the coming years.

Strengths (+) and weaknesses (-)

(+) Large and diversified economy

The US has the largest economy in the world (in nominal terms, second after China in PPP), that, after undergoing a successful rebalancing, is growing at a decent rate. The level of economic diversification is high.

(+) Self-sustainable in energy and food

With the development of shale gas fields, the current energy production and the highly developed agricultural sector, the US will be self-sustainable in the production of energy and (many) foods.

(+) Reserve currency of the world

The US dollar is the world’s reserve currency and is expected to retain that status for years to come.

(-) Partisan political scene

Democrats and Republicans still find it difficult to compromise on legislation, which hurts the effectiveness of the Federal government.

Key developments

1. Successful rebalancing and favourable oil prices support growth

Growth prospects for the US economy remain favourable, after GDP grew by about 2.2% in 2014 (figure 1), while internal and external rebalancing have continued. The government deficit fell to 2.8% of GDP in 2014, in part because of automatic spending cuts. Austerity is likely to persist, as these automatic spending cuts remain in place, reducing government spending by USD 99bn in 2015, leading to a projected deficit of 2.5% of GDP. The (central) government debt to GDP ratio is expected to start its descend from 75.4% of GDP in 2014 (figure 3). Strong growth in the private sector is likely to offset the negative effects of fiscal contraction, as low oil prices support private consumption and investment. Consumption will also be supported by the improving financial position of households as deleveraging continued last year, with the mortgage debt to GDP ratio falling back to 2002 levels (72% of GDP). Unemployment has declined substantially (to 5.6% in December), but some labour market slack remains with a lot of people underemployed (e.g. in part-time or lesser skilled employment) and the employment rate still substantially below the pre-crisis level.

Figure 1: GDP growth in components
Figure 1: GDP growth in componentsSource: EIU
Figure 2: Current account balance
Figure 2: Current account balanceSource: EIU

In recent years, the current account deficit has improved markedly from 3.0% of GDP in 2010 to 2.2% in 2014 and is projected to decline further to 1.8% in 2015 (figure 2). This improvement is driven mainly by an improvement of the service balance and the goods balance. The service balance improved as service exports increased across the board. The goods balance improved as exports rose faster than imports. The strengthening of domestic energy production thereby played a large role. Between 2010 and 2014 oil production in the US increased by 40%, while the share in worldwide oil production rose from 10% to 14%. The increase in production will persist in the next few years and contribute to a further decline of the current account balance. The US is likely to remain a net importer in the near future, but the increase of domestic production has reduced its external dependency and thus also improved its geopolitical position.

2. Return towards more conventional monetary policy in 2015

Monetary policy is likely to become more normal in the coming year, after the phasing out of quantitative easing, also known as tapering, was completed in 2014. The next step towards normalisation is a rate hike. The timing of such a hike will mainly depend on the state of the labour market and inflation. As already mentioned, there is still considerable labour market slack, so full employment is not yet in sight. Meanwhile, low wage growth and oil prices are keeping inflation down, limiting the need for a rate hike. Rabobank expects the rate hike not before 2015Q4. A normalisation of monetary policy may induce a correction of asset prices. The US stock market has been on an all-time high as excess liquidity likely pushed up asset prices (figure 4). The dollar, which had slipped as a result of QE, has already started to rise vis-à-vis other major currencies (figure 4).

Figure 3: Public debt and deficit
Figure 3: Public debt and deficitSource: EIU
Figure 4: Exchange rate and stock market
Figure 4: Exchange rate and stock marketSource: Macrobond

3. No increase of bipartisanship expected as new political constellation still promotes hard-line politics

Due to a lack of bipartisanship it has been difficult to pass legislation in recent year. In the October mid-term election the Republican Party gained a majority in the Senate. As a result, it now has a majority in the House and the Senate. One might expect this double majority to ease the legislative process but this need not be: As President Obama retains his right to veto any piece of legislation, a more right-wing congress may actually inhibit the legislative progress. In the last budgetary negotiations the Republicans have been more willing to seek compromise, as they were held responsible for the last government shutdown. However, the Tea Party and potential candidates for the Republican primary (for the presidential election of 2016) stand to gain from an uncooperative stance. Moreover, there are two controversial topics that they will want to fight Obama on: Immigration policy and the Affordable Care Act (“Obamacare”).

Factsheet of United States of America
Factsheet of United States of AmericaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

The United States of America (US) is the world’s largest economy in nominal terms. It is a relatively young country that gained independence from Great Britain in the 18th century, when the country became a republic with its leaders chosen by the population. Much of the political system that was implemented at the time, still exists, with a clear line of separation between the powers of the trias politica and between the powers of the federation and the states proper. The resulting checks and balances ensure accountability and protect against the tyranny of the majority, but make it difficult to implement far-reaching reforms The US has a highly diversified economy, with an abundance in natural resources (especially now that shale gas is being exploited), a highly developed industrial base and a very deep capital market. The flexibility of the economy was once again on display in the aftermath of the global financial crisis of 2008. The US was the first of the western economies that was able to turn the corner and achieve significant economic growth.

In the international arena, the US has lacked a natural ideological opponent, since the Soviet Union collapsed in the late 1980s. In the past decade, both Islamic terrorism and the increasing influence of China have been challenging US supremacy. While the War on Terror has been fought in Iraq and Afghanistan, it seems that the US’ appetite to interfere in the Middle East is waning. The development of the shale gas fields is very important in this aspect. Therefore, attention is increasingly focused on China, as the countries have (in)direct conflicts on cybercrime and influence in Southeast Asia.

Economic indicators of United States of America
Economic indicators of United States of AmericaSource: EIU
Jurriaan Kalf
RaboResearch Netherlands Rabobank KEO
+31 88 726 7864

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