Headwinds from the coronavirus are growing for the U.S. economy

In the fourth quarter of last year, the U.S. economy grew by an annualized 2.1 percent according to data published yesterday by the Bureau of Economic Analysis. The expansion was driven by private and public consumption spending. By contrast, corporate investment declined, probably against the backdrop of the trade dispute between the United States and China. In the first two quarters of the current year, the consequences of the coronavirus are likely to weigh on economic growth. The global spread is affecting global supply chains and dampening demand for goods and services worldwide; this will have a significant impact on U.S. companies. In addition, measures to contain the epidemic in the United States will weigh on domestic demand.(1) On the bright side, the trade conflict between the United States and China has eased – at least temporarily. The so-called “Phase One” agreement was signed in January. However, the agreed targets are unlikely to be achieved against the background of the coronavirus. In particular, the envisaged significant increase in U.S. exports to China is unrealistic.(2) 

The weaker US growth in the first half of the year will be felt on the labor market. In the coming months, significantly fewer new jobs will probably be created than in past months. In the further forecast period, the situation on the labor market should improve again. In view of these developments, it is to be expected that the U.S. Federal Reserve will soon lower its key interest rates; assuming a reduction of 50 basis points may be appropriate at the moment. All in all, I currently expect the U.S. economy to grow by 1.6 percent in the current year. In 2021, the growth rate will be at 1.7 percent. However, it is too early to fully assess the economic consequences of the coronavirus. Obviously, economic growth may be considerably reduced or even negative under a serious scenario.

(1) The growth of the US economy in the first half of the year is also dampened by the production stop of the Boeing 737 Max aircraft, which has been in effect since January; in addition to Boeing, numerous suppliers are also affected. With this decision, Boeing has reacted to the continuing flight ban after two crashes. The flight ban – at least in the United States – will probably only be lifted in the course of spring or summer.

(2) In the “Phase One” agreement, it was agreed that China would purchase U.S. goods and services over the next two years at a level 200 billion US dollars above China’s import level from the U.S. in 2017, which would be approximately doubled. China has also committed itself to eliminating what the U.S. considers unfair practices in technology transfer and to taking measures to better protect intellectual property. The United States has refrained from imposing special tariffs of 25 percent on various consumer goods. In addition, special tariffs were halved from 15 percent to 7.5 percent for a commodity group worth $120 billion. For its part, China significantly reduced tariffs on a number of goods in mid-February.

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