INFLATION AND MONETARY TIGHTENING DAMPEN ACTIVITY

After a strong recovery in growth, activity decelerated in 2022, hampered by inflation and high-interest rates. In 2023, growth will weaken further as these factors continue to weigh. Inflation is expected to continue the easing trend observed in the second half of last year, but it is likely to remain above the Federal Reserve’s target of 2%. After raising its policy rate by 425 basis points in 2022, the Fed will continue a cycle of monetary tightening unseen in over 40 years in the first quarter. Another 75 basis points could raise the Fed’s target rate range to 5.00% - 5.25%. Rates are expected to remain at these restrictive levels through 2023. As a result, household consumption (68% of GDP) will moderate. The spending allocation should continue to shift toward services at the expense of goods that benefited from the pandemic. The manufacturing industry could therefore suffer. However, easing inflation, increasing credit card balances and dissaving could help keep household expenditures afloat, thus (narrowly) avoiding a recession. The unemployment rate is expected to rise from its low 3.7% at the end of 2022, which could lead to increased cautiousness. Furthermore, the investment will also be constrained by the high-interest rate environment. Business capital spending plans will be curtailed despite a durably comfortable cash position at the end of 2022. Residential investment should continue to contract. The fall in the real estate market will result in weaker construction activity in 2023. The investment programs (infrastructure, energy transition, semiconductor production) adopted by the administration will, unlike in 2022, allow a (modest) positive contribution from government spending. In addition, a strong dollar and the sluggish global economic environment will limit the contribution of net exports.

DEBT BURDEN IS RISING

Spending cuts in response to the COVID-19 crisis and higher tax revenues contributed to a considerable reduction in the federal budget deficit in 2021-22. While it is expected to continue to decline, the debt should remain high after the next fiscal year. A divided Congress and high inflation could encourage some budgetary restraint. In this context, government spending will be driven by the execution of the investment programs adopted by President Joe Biden’s administration in late 2021 and 2022. The debt burden (1.8% of GDP in 2021-22) is also expected to continue to rise as US Treasury yields have increased in response to the Fed’s interest rate hikes. However, the authorities are not likely to face difficulties in servicing the debt. The country has unparalleled financing flexibility due to its status as a USD issuer, the USD being the world’s primary reserve currency. The debt ceiling will likely have to be raised by Congress in the first half of 2023. The risk of default exists if an agreement is not reached, but it is minimal.

In 2023, the current account deficit will remain significant, mainly driven by the structural deficit in the goods balance (4.7% of GDP in 2022). However, it is expected to moderate as merchandise imports slow in line with domestic demand. Exports of liquefied natural gas to Europe will remain strong, but foreign sales are expected to suffer from the strong dollar and the global economic environment. The normalization of international transport should result in a slight improvement in the surplus on the services account (0.9% of GDP). The positive primary income balance (0.7% of GDP) is expected to improve slightly as receipts from interest and deposits on US assets abroad increase. The transfer deficit will remain stable at around 0.6% of GDP. The attractiveness of US assets and the USD generate portfolio investments (Treasuries, stocks, etc.) to finance the deficit.

A DIVIDED CONGRESS WILL LIMIT THE BIDEN ADMINISTRATION’S POLICYMAKING UNTIL 2024

Democrat Joe Biden became President in January 2021 after a tumultuous transition marked by the 6 January assault on the Capitol by supporters of his predecessor, Republican Donald Trump. After a massive stimulus package dubbed the American Rescue Plan (March 2021), the President was able to have his priorities endorsed by Congress through an infrastructure plan (Infrastructure Investment and Jobs Act), measures to boost the energy transition (Inflation Reduction Act) and support for semiconductor production (CHIPS Act). However, his administration’s room for maneuver should be limited in the second half of his term. Although the Democrats have retained a narrow majority in the Senate (51 out of 100 seats), control of the House of Representatives has shifted to the Republicans (222 of 435 seats) following the November 2022 mid-term elections. As the political environment remains highly polarized, opportunities for bipartisan legislation will be limited. Party infighting is also likely to intensify as the 2024 elections approach, starting with the Presidential election. Donald Trump has officially declared his bid for the Republican nomination, but he might encounter some challenges. He is subject to several criminal investigations. In addition, the competition from Florida Governor Ron DeSantis has strengthened following the mid-term elections. On the Democratic side, doubts over a second-term bid remain for Joe Biden due to his age (82 in 2024). However, despite his lackluster approval ratings, the results of the 2022 elections have strengthened his bid.

On the foreign policy front, the focus has turned to Russia following its invasion of Ukraine. The United States has coordinated its sanctions against Russia with its Western and NATO partners, particularly in Europe. These actions are part of the Biden administration’s effort to return to a multilateral approach and re-engage with traditional partners. At the same time, tensions with China remain high, particularly over the contentious issues of Chinese trade practices and intellectual property protection. In addition, technological competition has intensified, as evidenced by restrictions on exports of technology associated with the semiconductor industry.