United States economic growth reduced to its worst level of the last five years. Even though the U.S. dollar has been increasing in value against many of its major peers, it’s rise has pushed local manufacturers to import cheap components. Exports decreased as it now costs more for international markets to buy from the U.S.
Despite the widening of the U.S. trade balance, consumers continued spending with increasing rates and there is an increase in business investment just as the United States new President Donald Trump pledged that these would be among the steps that would lead economic growth.
The Annualised U.S. Gross Domestic Product (GDP) for the last quarter of 2016 increased by 1.9% according to the Bureau of Economic Analysis, considerably lower than the reading of Q3 which was 3.5%, and failed to meet expectations by analysts for 2.2% increase. For the 2016 year, the economy grew only by 1.6% compared to much higher economic growth seen in 2015 at 2.6%.
According to analysts, the volatility generated before the UK referendum, its subsequent result, as well as the period prior to the U.S. presidential elections made it more difficult to forecast the levels of the economic growth. The discouraging result might put off the Federal Reserve (Fed) from agreeing to an interest rate increase, at least until the volatility levels settle down and they get a clearer view of the economy.
Donald Trump believes that the economy can grow with a faster pace compared to its performance under the presidency of Barack Obama. The treasury secretary Steve Mnuchin, shortly after his appointment, estimated that the economy is able to grow by as much as 4% after some tweaks such as reduction on taxes and infrastructure spending plans.
Recent threats by Donald Trump to impose a 20% import tax on goods from Mexico to finance a wall-border between U.S. and Mexico together with the strengthening value of the dollar that prevents exports, might keep uncertainty at high levels together with scepticism on higher economic growth during the year. Exports rose to high levels during Q3 2016 after international demand for soybeans increased as a result of poor supply from the Latin America. But during the last three months of 2016 export levels returned back to normal.
On the other hand, there are estimates for a brighter future given that unemployment is at very low levels, there are salary increases, and the real estate sector remains strong. Mr Trump’s promise for infrastructure spending and his plans for moving some local companies’ factories in the U.S. might work in favour of economic growth.
The EUR/USD on Thursday fell by 0.8% and on a weekly basis the world’s most popular currency pair remained relatively stable after decreasing by less than 0.1% to $1.07025.
It remains to be seen whether the slowdown in economic growth in the late parts of 2016 was a result of volatility seen in exports, or if the downwards trend might continue during the first quarter of 2017. It could all depend on timing of government consumption and tax cuts while it is now unclear when the Fed will proceed with the next interest rate increase.