Why is America bucking the trend?

Aside from all the headlines surrounding inflation and what central banks might do with interest rates, what is more, interesting this week is the divergence in the performances of global economies between America and the ROW. Yesterday, the ONS announced that their estimate for the last quarter of 2023 was that our economy shrank by 0.3%; officially, by the definition of two-quarters of negative growth, we are in a recession. As we also know the rate of inflation is twice what the Bank of England want as their target. Stagnant growth and higher prices are a horrible mix for a central bank.

Japan likewise unexpectedly announced this week that its economic growth stalled at the end of last year and also fulfilled the definition of falling into recession. We know Europe’s economy continues to struggle along. Germany, now the world’s third-largest economy, jumping above Japan’s, despite its output contracting in 2023. This week the German economic minister described the German economy as doing “dramatically bad”. China, we know, is struggling under the burden of debt to meet its growth targets. All around the world, there are signs of shrinking economic activity except in one place, America, where things seem to go from strength to strength. The Citi economic surprise index, which is attached, compares economic reports with expectations, and that has been almost one straight rising line from the start of the year. The world’s largest economy expanded at an annual rate of 3.3% over the three months to December.

It is often said that when America sneezes, the rest of the world catches a cold; well, it seems the rest of the world is under the weather, and yet America is in the best of health.

Why is this? One, unfortunately, will take a greater man than I to answer the question properly, but one can speculate. Americans are dealing with at least a similar level of monetary policy to many other developed economies in the world, with possibly a more restrictive one than many, so that’s not it. Growth in the AI boom is centered around the US, and that may well be having some positive sentiment effect, despite many mega-cap tech companies announcing layoffs to their workforce. The US consumer has generally held up well, happy to spend the dollars gifted to them during COVID-19. The economy itself is pretty self-sufficient, has its own oil, grows its own crops, capable of making its own things. I guess that can help. The broader question is, will the malaise the rest of the world is in, economically speaking, will start to impact America? One would assume, at some point, it will do.

The Fed was accused of being too slow to react to rising rates one can only assume they will continue to be circumspect, almost irrespective of what inflation does before they look to cut. Thankfully I think the days of QE are over.