United States: Risk Assessment
Country Risk Rating
Business Climate Rating
- Flexibility in the labor market
- Full employment is also one of the objectives of the Federal Reserve
- The predominant role of the dollar in the global economy
- Nearly 60% of public debt held by residents
- Attractive market: leader in research & innovation, huge market
- Reduced corporate tax rates
- Increasing energy self-sufficiency
- Low labor force participation rate
- Low geographic flexibility of households
- Polarisation of political landscape
- Lower fertility rate
- Obsolescence of many infrastructures
- Increasing inequalities
Tax Reforms to Delay the Slowdown in Activity
Although President Trump was unable to make any progress with any major measures between January and November 2017, activity picked up strongly thanks to the resilience of household consumption and the recovery in housing investment, in a context of high levels of confidence among the agents. Growth is expected to increase in 2018, mainly because of acceleration in company investments, bolstered by the significant cut in corporation tax from 35% to 21% in President Trump’s tax reforms. Growth in household consumption however is likely to slow, despite the historically low rate of unemployment (around 4%), significant increases in real wages, as well as the wealth effect generated by rising housing prices. The impact of the reduction in income tax – which will mainly benefit the most comfortably off (maximum tax rate cut from 39.7% to 37%) – will be partly offset by a continued tightening of monetary policy, with the Fed planning on two further rises in its key interest rate in the second half of 2018, after March and June hikes. The consequent increase in the cost of credit will mainly be felt by lower income households with an impact on their consumption. In addition, households’ room for maneuver is very limited as a result of their levels of indebtedness, stable but very high (138% of GDI in Q4 2017), and the reduction in their savings rate over the last two years (3.3% in March 2018 compared with 6% in Q4 2015). This slowing in demand will mainly hit the retail, clothing and transport sectors. Conversely the energy sector will feel the benefits of raising oil prices. This, combined with the growth in wages, will lead to an upwards shift in inflation, which is expected to remain close to the Fed’s target (2% excluding energy and food). Whilst it is expected to slow at the end of the year, the economy will continue to grow and company insolvencies are expected to be 4% lower in 2018.
With the Tax Reforms Driving Up the Public Deficit, Debt Will Rebound
According to the Congressional Budget Office (CBO), despite the removal of local tax deductions for federal taxes, the tax reform being instituted by President Trump will amount to a loss of revenue for the US Treasury of 1.4 trillion dollars over 10 years, around 0.7% of GDP per year. At the same time, the government will also be cutting social expenditure, in particular on healthcare (removal of fines for those not having health insurance, which is likely to lead to a fall in the numbers of insured citizens), in order to make savings. The scale of the tax reform will however result in an increase in the deficit in 2018, despite any slight associated increase in growth (estimated at 0.3% of GDP). The US public debt, among the largest in the world, should therefore rebound.
A Large Trading Deficit Financed by Foreign Savings
The balance of goods is in substantial deficit due to imports of consumer and capital goods. This deficit is partly offset by the surplus in the balance of services and the balance of income, the dividends from US investments in other countries being greater than the transfers of foreign investors and workers. The large current account deficit is being financed by FDI and portfolio investments. The result is that the external position is a net structural deficit (40.5% of GDP in 2017).
Whilst President Trump has a distinct wish to increase protectionism (tariffs on steel and aluminum imports, commercial skirmishes with China, abandon of the Trans-Pacific Partnership (TPP), renegotiation of the free-trade agreement with Canada and Mexico (NAFTA)), the external deficit is expected to worsen in 2018 because of the upwards pressure on the dollar-linked with the tighter monetary policy of the Fed – which will reduce the competitiveness of US exports, and the continued buoyancy of imports, in the wake of domestic demand, in particular from investment.
Critical Mid-Term Elections Following the First Legislative Victory for President Trump
The vote on the tax reforms in December 2017 was the first legislative victory for President Trump, as he experiences considerable difficulties in implementing his programme. This victory was vital for President Trump with the upcoming mid-term elections to be held in November 2018, during which all the seats in the House of Representatives, as well as one-third of Senate seats will be up for election. Despite a Republican majority in both Houses of Congress, President Trump is already facing a rebellion within the Republican party. A change in the majority during the mid-term elections would make any further reforms almost impossible. The victory of the Democrat candidate in a House special election in a Pennsylvania district (that the President Trump won by 20 points in 2016) in March 2018 would seem to indicate that the Democrats could at least win back the House of Representatives.