United States: Risk Assessment
Country Risk Rating
Business Climate Rating
- Flexible labor market
- Full employment is one of the Federal Reserve’s objectives
- Dollar’s predominant role in the global economy
- Almost 60% of public debt held by residents
- Highly attractive: leader in research & innovation, huge market
- Reduced corporate tax rates
- Increasing energy self-sufficiency
- Low labor market participation
- Households not very geographically flexible
- High household debt (131% of gross disposable income)
- Polarised political landscape
- Lower fertility rate
- Outdated infrastructure
- Increasing inequalities
Slowdown in activity after a peak
Growth will slow in 2019, reflecting business investment, which is set to be considerably less vibrant after being driven in 2018 by President Donald Trump's tax reforms (corporate tax cut from 35% to 21%). In addition, business profit margins will continue to be affected by increased input costs in connection with the customs duties imposed on a wide range of products, including steel and aluminum. Credit will also become more expensive due to the continued tightening of monetary policy, with the FED planning to continue to raise its key interest rate in 2019, after hiking it from 1.5% to 2.5% in 2018. Despite these headwinds, household consumption should show resilience, thanks to the ongoing decline in the unemployment rate (3.7% in October 2018, the lowest in five decades) and the significant acceleration in real wages. As military spending surges in 2019 (USD 80 billion increase, or 0.4% of GDP), public consumption will contribute more to growth. Conversely, the business environment will be much less favorable (slowdown in the main partner economies, protectionist reprisals by those same partners).Despite the signing of the USMCA trade deal (renegotiated NAFTA), exports – which have become less competitive due to upward pressure on the dollar caused by the FED's monetary tightening – will slow significantly. As imports decelerate more slowly – despite protectionist measures, due to resilient household consumption –, foreign trade will weigh more heavily on growth.
The automotive and construction sectors are expected to be particularly affected on the demand side by dearer credit and on the supply side by rising metal input costs. Meanwhile, the energy sector will continue to be driven by high oil prices.
Deterioration in the public and external accounts
The substantial government deficit is expected to widen further in 2019. While it increased sharply in 2018 with President Trump's tax reforms (USD 1.4 trillion in tax cuts over ten years, or about 0.7% of GDP per year), the deficit will continue to deteriorate, despite the strong economy, due to the sharp rise in expenditure, especially military spending. Subject to agreement with the Democrats in the House of Representatives, a USD 200 billion (0.9% of GDP) infrastructure investment plan (according to the first version presented by President Trump) could further increase the government deficit. As a result, US public debt, which is among the highest in the world, will remain on an upward trend.
Substantial imports of consumer and capital goods have led to a chronic deficit in the goods balance, which is only partially offset by the surpluses in services and income (dividends from US investments abroad exceed remittances from investors and foreign workers). Despite the implementation of protectionist measures and the continued trade war with China (customs duties of 10% on USD 200 billion of Chinese imports until March 2019, then potential increase to 25%), the current account deficit is expected to widen in 2019. With the deficit being financed by FDI and portfolio investment, the US net external position is structurally in deficit (42% of GDP at the end of June 2018).
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.