OUTLOOK ’19: US economy to grow against multiple downside risks

HOUSTON (ICIS)–US economic growth enjoyed during 2018 is likely to continue through 2019, though lingering trade issues, continuing labour challenges and concerns over a recession are raising uncertainty.

TRADE FEARS

The National Association of Business Economists (NABE) expects GDP growth to lower from 2.9% in 2018 to 2.7% in 2019. NABE cited increasing trade tensions as the primary downside risk, which partly lowered the GDP forecast.

Increasing trade tensions are persisting despite progress made near the end of 2018.

China President Xi Jinping and US President Donald Trump agreed to a 90-day halt in imposing additional tariffs at the G20 summit in Argentina.

The US will not raise tariffs on $200bn worth of Chinese goods from 10% to 25% on 1 January 2019, assuming China will import more agricultural, energy, industrial and other products from the US.

Though the agreement aims to reduce trade imbalances between the two countries, economists have expressed concern whether issues can be resolved within the 90-day time frame.

Trade inside North America is also entering 2019 amid ambiguity.

NAFTA’s replacement, the US Mexico Canada Agreement (USMCA), was signed by the Canadian, US and Mexican heads of state near the end of 2018, giving relief to market participants concerned on whether the decades-old trade agreement would be scrapped by the Trump administration.

The USMCA must still be ratified by federal legislatures however.

US midterm elections resulted in control for the House of Representatives shifting from Republicans to Democrats, with a similar shift in several state-level governments.

The risk remains that a Democrat-controlled House could hold up ratification of the USMCA.

Trade issue fears reach further than GDP expectations. A majority of NABE economists lowered their business investment forecasts for 2019, citing trade policy, while two-thirds have raised their inflation forecasts.

FISCAL POLICY

Pressure from trade uncertainty will spill into 2019 alongside tightening financial conditions, while benefits from 2018 US tax cuts will not.

The US Federal Reserve, which has been tightening monetary policy through 2018, is expected to announce three interest rate increases in 2019, American Chemistry Council (ACC) chief economist Kevin Swift noted.

WORKFORCE WOES

The US labour force will also roll over into 2019, only to be exacerbated by demographic shifts as the aging workforce retires.

“When you get into the last 3% of the labour force, it’s hard to be specialised unless you’re willing to pay a premium,” Deloitte vice chairman Duane Dickson said.

A heavier emphasis in 2019 on recruiting younger Americans into the workforce is likely, as well as increased opportunities for training.

“It’s definitely one thing to look out for,” Dickson said.

An increased focus on automation is more likely to help shore up labour issues in 2019 than an increase in immigrant workers. NABE cited immigration restrictions among downside risks to the US economy.

The projections for downside risks in 2019 are not without benefits. Softness in the economy could free up labour, Dickson noted.

RISK OF RECESSION

Regarding recession fears, economists surveyed by NABE expect a 20% risk of recession by the second half of 2019, and a 30% chance by the end of 2020.

The National Automobile Dealers Association (NADA) also speculated that a US recession could begin in late 2019 or early 2020, though NADA said its data indicated “a solid year” for new auto sales.

Focus article by David Haydon

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