How resilient is the US economy?

If recession in the US is defined by two quarters of negative growth, and if the Gross Domestic Output measure of growth is used instead of the conventional GDP, then the US would have suffered two recessions in the past year. That’s clearly a very different story to the one that most of us see.

Now it might appear that we have unfairly picked on the US when, in fact, America has been one of the strongest performers in recent years. However, in Mr. Steve Barrow, Head of Standard Bank G10 Strategy’s view, even here the US has flattered to deceive and, if we are right about this it bodes ill for the dollar going forward.

“We don’t deny that the US has been relatively strong but, if we take into account some of the headwinds that others have faced, our only surprise is that the US has not outperformed by more. If we compare the US and the euro zone, for instance, the US has outperformed since the pandemic struck in early 2020. The US economy is just over 5% larger than Q4 2019 while the euro zone has seen its GDP rise by just under 3% over the period. This might seem like a big gap but we need to bear in mind the headwinds and tailwinds that both have faced. Now clearly the pandemic itself was a largely symmetrical headwind as all countries saw large fatalities and big hits to growth as countries were locked down. However, significant differences emerge when we look at the fiscal response of governments, with the extent of US support significantly outweighing the support provided by others. US fiscal support amounted to more than 25% of GDP, which was double the support of any of the major euro zone nations”, said Mr. Steve Barrow.

Euro zone governments offered far less direct support to their citizens than the US but did offer more indirect support. However, the direct support, such as a cash handout or a tax cut is always likely to be more stimulative than indirect support, such as loan guarantees for firms.

Notably, Japan has used both for many years and it is instructive that analysts are usually only interested in the imamizu, or ‘real water’ from the direct fiscal action, not the indirect fiscal support. This fact alone should have ensured significant economic outperformance in the US. But it does not end here.

For the Covid shock was soon followed by the Russia/Ukraine shock and this time the economic implications were very asymmetric. The euro zone suffered a huge deterioration in its terms of trade with Germany, for instance, seeing a more than 10% annual decline in its terms of trade just two months after the conflict began on account of its hefty reliance on imported gas from Russia.

By contrast, the US’s terms of trade improved by around 5% over the same period thanks to its relative self-sufficiency in energy compared to the euro zone. Not only do we feel that the euro zone economy has performed pretty well compared to the US in spite of this hugely adverse shock; it also seems that there has been a more accountable reason for the surge in euro zone inflation than we’ve seen in the US.

For while both were adversely hit by supply chain problems during the pandemic it is only the euro zone that has suffered the surge in energy costs for consumers. This leads to some concern that US inflation could ultimately prove stickier than we see in the euro zone.

On the growth front, there is the clear prospect now of payback for US fiscal largesse as the Republicans use the debt ceiling to claw back spending. There may also be the issue in the US that too much stimulus has created pressure points, such as regional bank troubles which, as yet, have not infected the euro zone.

“We think the euro zone will make up this growth deficit, and more. That might still occur within the context of a recession in the euro zone this year but, if it does, it is unlikely to be alone as there’s a fair chance that the US will go into another downturn, even if it is still not classified by the NABE as an official recession”, said Mr. Steve Barrow.