Despite further growth in the second half of the year, the US economy will grow less than 2.5% in 2015 for the fifth straight year, according to Dun and Bradstreet’s latest forecast. The strength of the US dollar will be a slight drag on US results through the end of the year.
As in the last few years, the US economy will spend the rest of 2015 recovering from the sudden pullback in growth in Q1. US real GDP eked out a meager growth of 0.6% in Q1, a significant slowdown compared with growth of 2.2% and 5% in Q4 and Q3 of 2014, respectively. Growth in Q2 2015 was a modest 2.3%, prompting D&B to maintain a forecast of 2.3% growth for all of 2015.
A first-quarter slowdown seems to be the pattern recently for the US economy. Growth has been surprisingly slower in five of the last six Q1s since the recovery, with 2015 becoming the latest year that the economy has started on a weak note.
One of the major issues facing the economy in the near term is the strength of the US dollar against other currencies. Between June 2014 and March 2015, the nominal trade-weighted US dollar appreciated by about 14% against a broad basket of currencies, and by about 20% against major currencies.
One of the striking features of the latest round of dollar appreciation has been its surprisingly fast pace. The dollar rose much faster and much higher than monetary policy makers had expected in the second half of 2014 and in early 2015. The impact on the real economy has also been more pronounced than expected.
The factors behind this rapid appreciation will hold true in the near term as well. Hence, over the next few months D&B expects modest appreciation in the dollar. Two major sources of divergence are driving up the dollar. First, despite occasional hiccups, growth in the US was higher than most of the country’s Western peers in the second half of 2014.
Second, the US Federal Reserve has moved closer and closer to raising interest rates, while central bankers in other parts of the world continue to drive down rates by pushing the limits of monetary policy at the zero lower bound (ZLB).
These factors have combined to make the US dollar an attractive investment, prompting global investors to pull funds out of slowing emerging markets to invest in the dollar. Geopolitical uncertainty like the Ukraine crisis and other disruptions like the turmoil in Greece have further reinforced the dollar’s status as a safe haven, driving its value higher.
Although the dollar will not rise as fast this year as in 2014, it will continue gaining ground against other currencies as the US economy strengthens, the Fed starts to tighten interest rates, and central banks of peer economies stick to their easing bias. A return to the longer-run trend of depreciation is not expected until the global economy fires on all cylinders in the second half of 2016.
The biggest obstacle resulting from the strong dollar is its effect on international trade. A strong dollar makes US exports more expensive for foreigners and imports cheaper for US businesses. The strong dollar has also eroded profits of large US multinational corporations as overseas revenues are worth less in US dollars. This is a downside for business investment and its contribution to growth, as corporations have less money remaining for capital expenditure.
Small businesses and consumers, however, may benefit from the strong dollar. A large number of small businesses export little or nothing, hence higher global prices for US exports do not weigh on their overseas sales.
Meanwhile, the drop in import prices affords these businesses the opportunity to source inputs from abroad at a much lower cost, thus boosting their profitability. A strong dollar is better for consumers as it keeps prices of imported goods low and prevents US inflation.
Global commodity prices are quoted in dollars, so the appreciation of the dollar has been one of the main factors driving the recent drop in commodity prices. This is an added upside for consumer spending, as households save more, particularly on energy.
Finally, the strong dollar could also impact US monetary policy. If imported deflation continues to keep overall US inflation negligible and core inflation stays below the central bank’s target of 2%, the Fed might further delay the first interest rate liftoff. Ultimately, however, D&B expects the strength of the dollar to be a small drag on the US economy.
Bodhi Ganguli is a Senior Economist on D&B’s Global Data, Insight & Analytics team. Based in Short Hills, NJ, Bodhi covers sub-Saharan Africa as a contributor to D&B Macro Market/Country Insight Products. He is also a member of D&B’s US Economic Advisory Panel. He received his Ph.D. in economics from Rutgers University and his bachelor’s degree in economics from Presidency College, India.
Join Bodhi on Tuesday, August 4 for the August Economic Briefing, where he will review Dun & Bradstreet’s latest view on the strength of the U.S. economy.