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 Growth
Although President Donald 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 agents. Growth is expected to remain robust 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. Conversely, growth in household consumption is likely to slow, despite the historically low rate of unemployment (around 4%), significant increases in real wages, and the wealth effect generated by rising housing prices. The impact of the reduction in income tax – which will mainly benefit the most wealthy (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 three further rises in its key interest rate in 2018. 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 due to their levels of indebtedness – stable but very high (136% of GDI in Q2 2017) – and the reduction in their savings rate over the last two years (3.2% in October 2017, down -3.1 points in two years). This slowing in demand will mainly hit the retail, clothing, and transport sectors. However, the energy sector will feel the benefits of raising oil prices. This, combined with the growth in wages, is expected to lead to a slight upwards shift in inflation, which will come closer to the Fed’s target (2%). 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 Continue On Its Upward Slope
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 USD 1.4 trillion over ten years – around 7% of GDP. At the same time, the government will also cut social expenditure, notably 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 0.25% of GDP). The US public debt, among the largest in the world, should, therefore, continue to grow.
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 currently financed by FDI and portfolio investments. The result is that the external position is a net structural deficit (USD7,935 billion in Q2 2017, approximately 45% of GDP).
While President Trump has a distinct wish to increase protectionism – as can be seen with the abandoning of the Trans-Pacific Partnership (TPP) and the renegotiation of the free-trade agreement with Canada and Mexico (NAFTA) – the external deficit is expected to worsen in 2018 due to 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, notably from investment.
Critical Mid-Term Elections Following the First Legislative Victory for President Trump
The December 2017 vote on tax reforms was the first legislative victory for President Trump, who has so far experienced 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 the Senatorial election in Alabama (a traditionally solid Republican State) in December 2017 would seem to indicate that the Democrats could at least win back the Senate.