Growing Pains

On Friday 27th February, the US Commerce Department revealed the economy grew by 2.2% in the final quarter of 2014, weaker than the estimated 2.6%. Fine margins though it may be, the slowdown in the economy was more pronounced than previously thought.

The concerns stem from the fact that the fourth quarter growth had been the strongest in 11 years. In other words, the economy failed to maximise its #gainz. Nevertheless, the figures for 2014 overall shows that it was bulk season all round – the economy expanded 2.4%, up slightly from 2.2% growth in 2013.

Whilst depleting oil prices have been a cause for concern for most, it has provided ample incentive for consumers to shop until they drop as falling fuel prices have given consumers more money to spend elsewhere – a pretty positive return given that consumer spending in America accounts for 70% of economic activity. The economic revival was echoed by Sal Guatierie, senior economist at BMO Capital Markets, who said ‘average annual growth of 2.9% in the past six quarters still denotes a meaningful upward shift from 2.1% in the first four years of the recovery.’

The reason for the downward reversion in the last quarter was due to slower stockpiling by businesses and a bigger trade deficit, the unofficial bane of most countries. However during that time, trade weighed more heavily on growth as imports grew much more strongly than at first thought. This is largely down to the effects of a rising dollar, which in turn reduces the cost on imported goods. It may be early, but this might be a good time for Americans to loosen their purse strings and do all their Christmas shopping – after all, there’s no time like the present.

There is a school of thought that many are overreacting about the rate of growth. The truth is, they are. Some context is needed: the decelerated growth only represented a three month time period; overall GDP for 2014 as a whole was healthier than a Sainsbury’s meal deal.

Moreover, the financial forecast for 2015 predicts strong economic growth. The most optimistic figures forecast that growth will rise above 3% – this would represent the highest margin of growth in a decade. There is a striking similarity between good news about the economy and London buses: you wait three months for something to happen, and then you get it all at once. Even despite a slow fourth quarter, the US added an average of 284,000 new jobs in that period. Unemployment is falling and coupled with negative inflation, it means that the Federal Reserve has to maintain interest rates as close to zero as possible.

The reality is that growth will come in around 2.5% in the current quarter and will hover between 2.5-3% for the rest of the year. If all goes to plan, it will represent the best GDP performance since the economy grew by 3.3% in 2005. Growing pains are good pains.

 

By Kamran Khan

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s