Qatar- Strong consumption to lift US growth above potential: QNB

(MENAFN- The Peninsula)

DOHA: Despite the fourth quarter slowdown strong consumption will lift US growth around 2 percent in 2016 slightly above potential.

The US economy experienced strong growth in the second and third quarters of 2015 expanding by 3.9 percent and 2.0 percent respectively. However the strong performance was derailed in the fourth quarter which saw the economy growing by only 0.7 percent. The slowdown was largely due to divestments in the energy sector and a negative contribution from net exports. The drag from these two factors is expected to continue in 2016 but we project that strong consumption will lift US growth QNB’s weekly ‘economic commentary’ noted yesterday.

The activities in the US economy can be analysed by examining its different components: personal consumption private-sector investments government expenditure and net exports. The sum of these components yields a measure of aggregate demand in the economy that is termed gross domestic product or GDP. So how do we see each of these components faring in 2016?

“We expect private consumption to continue to grow in 2016 at around 3.3 percent. This is by far the largest component of GDP accounting for nearly 70 percent. The US consumer is enjoying an array of favourable conditions. Wage growth has picked up in recent months to reach 2.5 percent in December. Employment has increased by an average of over 220k per month in 2015 and unemployment has fallen to 5.0 percent. The strong recovery in the labour market and the decline in the unemployment rate implies that higher wages are benefiting more people. Consumers’ spending power has been further strengthened by the decline in oil prices which has freed up some of their income. One might argue that the recent decline in equity prices (7.5 percent so far this year) might reduce consumers’ wealth which could reduce their spending. However any such effect is likely to be small and offset by rising house prices. Indeed surveys show consumer confidence is high and rising undented by the recent decline in equity prices” the QNB report said.

The picture is not so rosy for investments. Lower oil prices are pushing US energy firms to cut their capital spending. “In addition inventories have been rising at a fast and unsustainable pace which is likely to be a drag on growth in 2016. On the other hand we expect other components of investments to grow at a moderate pace especially residential investments boosted by a recovering housing market. Overall we expect investment growth to slow from 4.8 percent in 2015 to 1.6 percent in 2016 the slowest growth rate since 2009” the QNB report said.

QNB projects government spending to have only a minor effect on growth. Fiscal policy in the US is currently neither expansionary nor contractionary and therefore unlikely to impact growth significantly.

“We expect net exports to continue to be a drag on the economy. The rising US dollar has already increased real effective exchange rate a measure of the loss in price competitiveness of exports by 15.6% since the beginning of 2014. The US dollar is likely to continue rising in the future as the US Federal Reserve (Fed) is expected to continue its monetary tightening while the other major central banks notably in the Euro Area and Japan are projected to ease further. As a result we expect net exports to subtract around 0.4 percentage points from GDP in line with what happened in Q4 2015” it said.

Adding up the different expenditure components we expect growth to pick up from 0.7 percent in Q4 2015 to 2.1 percent in 2016. Strong consumption growth should be the main driver of overall economic growth. It is expected to more than offset the headwinds from investments and net exports given that private consumption accounts for the majority of total spending in the economy.”

The Peninsula