Growth declines in the US and UK

Growth declines in the US and UK
The International Monetary Fund (IMF) has said that US and UK economies will be growing at lesser rates than previously predicted. According to new estimates, US economic growth will be 2.1% rather than 2.5%. UK is set to grow by 1.7% instead of 2% that was forecast in April.

Background

Both UK and the US have witnessed dramatic changes in their political landscape in 2016.

Britain voted to leave the EU which left experts voicing concerns over its stability post Brexit. UK is now locked in negotiations with EU officials as the roadmap for its exit is drawn up. 

Despite being considered a long shot, Donald Trump won the US presidential election in 2016. He has taken a strong stand in favor of protectionism and has pulled US from the Trans-Pacific Partnership deal. He has also pulled US from the Paris Climate Agreement and has called for a complete overhaul of NAFTA. The current White House has also been mired in multiple controversies and members of the Trump inner circle are subject to a Department of Justice investigation.

Analysis

In April, IMF had predicted a higher growth rate for the UK as the economy grew in the three months since the Brexit vote. It said that the lowered projections are a result of the economic growth slowing down in the first three months of 2017.  Noting that UK’s performance has been “tepid so far,” Maurice Obstfeld, the IMF’s economic counsellor said, that the full impact of Brexit “remains unclear.”

The Trump administration has projected a growth rate of 3% for the US which is at odds with the predictions of IMF. US also hopes to give a boost to its economy through expected tax cuts and federal spending.  The IMF has ruled US’ projection unlikely as the labor market is already at a level consistent with full employment. It also critiqued the US administration’s ever evolving policy plans as a source for uncertainty.

Globally, the prognosis is far more optimistic. IMF has projected a higher than expected growth for China, Japan and the Eurozone countries like Germany, France, Italy and Spain. Due to the strong performances expected from these nations, global growth is expected to be 3.5%. Obstfeld said, “The recovery in global growth that we projected in April is on a firmer footing; there is now no question mark over the world economy’s gain in momentum.”

Assessment

Our assessment is that in the short term it appears that the lower growth in US and UK might be linked to a combination of their protectionist policies and political instability. It also alludes that the IMF figures in favor of Japan and other European countries make a strong argument in favor of global trade. However, it would be too early to predict grim outcomes for UK and US. 

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