“Localization challenge”

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Country Report

United States of America

Generated on November 20th 2018

Economist Intelligence Unit 20 Cabot Square London E14 4QW United Kingdom

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The Economist Intelligence Unit

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ISSN 2047-6035

Symbols for tables

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United States of America

Summary Briefing sheet

Outlook for 2019-23 Political stability

Election watch

International relations

Policy trends

Fiscal policy

Monetary policy

International assumptions

Economic growth

Inflation

Exchange rates

External sector

Forecast summary

Quarterly forecasts

Data and charts Annual data and forecast

Quarterly data

Monthly data

Annual trends charts

Quarterly trends charts

Monthly trends charts

Comparative economic indicators

Summary Basic data

Political structure

Recent analysis Politics Forecast updates

Economy Analysis

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Briefing sheet Editor: Cailin Birch

Forecast Closing Date: November 14, 2018

Political and economic outlook

The Economist Intelligence Unit expects the president, Donald Trump, to drive his own policy agenda in 2019-20. Faced with stronger Democratic opposition in Congress, Mr Trump will focus on policy that does not require Congressional approval. The investigation commissioned by the Department of Justice into potential links between Mr Trump and his advisers and the Russian state will dominate the presidential term, presenting the main risk to the continuity of this administration. We expect the Federal Reserve (Fed, the central bank) to increase the policy rate once more in 2018 and three times in 2019, keeping core inflation fairly close to its 2% target. We expect the Fed to cut rates in 2020 as GDP growth slows. The fiscal position will worsen significantly in 2019-20 owing to tax cuts and higher public spending. Although spending restraint will improve in 2021-22, the fiscal deficit will remain wide compared with previous years, owing to weaker revenue growth. We expect rising interest rates and inflationary pressure related to protectionist tariffs to cause real GDP growth to slow in 2019, to 2.2%, and to slump in 2020, to 1.3%. We expect the economy to make a modest recovery in 2021-23, averaging 1.9% growth per year. Strong economic fundamentals in the US and slower growth elsewhere will support the dollar in late 2018 and early 2019. However, we expect the dollar to weaken slightly from late 2019 onwards, in line with the overall performance of the economy.

Key indicators 2018a 2019b 2020b 2021b 2022b 2023b

Real GDP growth (%)c 2.9 2.2 1.3 1.7 2.0 1.9

Consumer price inflation (av; %) 2.6 2.4 1.6 1.8 1.7 1.8

Government balance (% of GDP)d -3.8 -5.0 -5.9 -5.2 -4.6 -4.5

Current-account balance (% of GDP) -2.5 -2.8 -2.6 -2.7 -2.6 -2.6

Money market rate (av; %)e 2.1 2.9 2.5 2.6 2.9 3.2

Unemployment rate (%) 3.9 4.0 4.6 4.4 4.3 4.8

Exchange rate US$:€ (av) 1.18 1.19 1.21 1.21 1.24 1.24 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Seasonally adjusted annual

rate. d Federal government, financial year (October-September). e Rate for firms with AA rating.

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Key changes since October 5th

Democrats secured a majority in the House of Representatives (the lower house) in the November 6th mid-term elections, while the Republicans held on to their thin majority in the Senate (upper house). A split Congress means further legislative stagnation in 2019-20. Shortly after the mid-term elections, the attorney-general, Jeff Sessions, resigned at Mr Trump's request. Mr Sessions has been replaced by a Trump loyalist, Matthew Whitaker, who is unlikely to recuse himself from the Mueller investigation. We have revised down our estimate slightly for real growth in fixed investment in 2018, to 5.4% (from 5.5% previously), reflecting weaker than expected investment growth in the third quarter. Rising trade barriers will weigh on firms' competitiveness in late 2018. We have revised down our forecast for the federal government deficit in 2019-20, to an average of 5.4% per year (from 6.1% previously). However, this is mainly related to base effects, as the 2018 fiscal deficit (3.8%) was slightly lower than we had anticipated. As expected, the Fed left the policy rate on hold in its November meeting. In the light of recent strong economic data, we continue to expect a fourth increase in December, which will take the policy rate to the target band of 2.25-2.5%.

The month ahead

November 28th—US GDP (third quarter, revised): The first estimate of third-quarter GDP growth, released in October by the Bureau of Economic Analysis, was fairly strong, at 3.5%. Corporate earnings have suffered in September-October, owing partially to trade tariffs, and the revised GDP estimate may reflect this. December 6th—OPEC summit: OPEC and Russia will announce whether or not further oil production cuts can be expected in 2019. The outcome will have implications for headline US inflation, which tends to track oil prices closely. Further OPEC production cuts would probably boost oil prices heading into 2019. December TBC—US­China trade talks: The Trump administration has threatened to impose tariffs on a further US$200bn-worth of imports from China in early 2019 unless sufficient progress is made in ongoing trade discussions. Although both economies would benefit from a deal, we do not believe that one is likely. TBC—Mr Trump's interview with Robert Mueller: As part of his investigation into the president, the special counsel has requested that Mr Trump testify. We believe that Mr Trump will eventually acquiesce, but this would be a high-risk move on his part. It is likely to take months before the full details of their conversation emerge.

Major risks to our forecast Scenarios, Q3 2018 Probability Impact Intensity

The US falls into recession High High 16

Partisanship in Congress completely handicaps policymaking Very high Moderate 15

The US imposes tariffs on automotive imports Moderate High 12

Congress fails to pass a budget and shuts down the government Very high Low 10

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Individual firms attract Donald Trump's ire Very high Low 10

Note. Scenarios and scores are taken from our Risk Briefing product. Risk scenarios are potential

developments that might substantially change the business operating environment over the coming two

years. Risk intensity is a product of probability and impact, on a 25-point scale. Source: The Economist Intelligence Unit.

Outlook for 2019-23

Political stability Political instability will remain high under the administration of Donald Trump. The president governs with an impulsive streak, which makes his decision-making appear erratic. In the second year of his presidency he has shown less tolerance for dissenting views, and The Economist Intelligence Unit expects him to take an increasingly direct role in policy decisions. This shift is being encouraged by the high turnover of staff (meaning that few cabinet members are able to influence policy over a long period) and by a divided Congress, which will struggle to reach the consensus necessary to pass major legislation.

We do not expect the quality of White House governance to improve in the remainder of Mr Trump's term. Key administration officials will continue to be replaced regularly, and the president will increasingly struggle to find high­calibre candidates willing to serve—in part given his preference for appointing officials on the basis of their loyalty to his agenda rather than their experience. Mr Trump is growing increasingly frustrated with reports by former staffers that depict a White House in disarray; we expect Mr Trump to take an increasingly tight grip of policymaking as a result. Members of the inner administration will continue to compete for Mr Trump's attention but will struggle to check his policy impulses. This will periodically result in inconsistent messaging, particularly regarding trade policy. Meanwhile, the president will continue to stir up the US's culture wars to remain in touch with his base. This off-message communication style also bolsters his maverick credentials. However, he is unlikely to use his unusual level of freedom to support centrist ideas such as tighter gun control.

Although Mr Trump's style of governance is problematic for Republicans, criticism of him from within the party remains muted. The results of the November 2018 mid-term elections showed waning support for Mr Trump among centrist voters, but he remains more popular with Republican voters than does the Republican Party itself, which makes speaking out against him a risky strategy for Republicans ahead of the 2020 elections. The Trump administration is also working to confirm a significant number of conservative judges across all levels of the judicial system, and Republicans will continue to support this. The party and the president will therefore maintain a veneer of unity in the coming months.

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Election watch Although the final votes are still being counted in some races, the mid-term elections on November 6th largely played out as we, and the polls, had projected. The Democrats secured a comfortable majority of 15-20 seats in the 435-seat House of Representatives (the lower house). Republicans, however, are expected to pick up a net one or two seats in the Senate (the upper house), adding to their previously razor-thin majority. The split legislature will struggle to pass major legislation, particularly against the backdrop of Mr Trump's partisan rhetoric.

A strong performance by Democrats in the House was in line with historical precedent. Historically, governing parties have tended to lose an average of 25 House seats at the mid-term elections, and the previous Republican Congress has been deeply unpopular. Nonetheless, Democrats gained more than the average number of seats; this is partly due to centrist voters' waning support for Mr Trump, but also to Democrats' strong performance in suburban areas, particularly with female voters—which may establish this as a battleground in the 2020 presidential elections. In Senate elections, however, Republicans performed well in primarily rural states like Montana and North Dakota, which are likely to be a key focus in 2020.

The Democrats have long been encouraged by demographic changes. Hispanic and African- American populations are growing faster than the national average, and both groups strongly favour the Democrats. However, the 2016 election showed that the party took its rust-belt base for granted. Before 2020 it must decide whether to focus on winning back these voters or pursuing the sun-belt states of Florida, Arizona and North Carolina.

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International relations We expect the US to become increasingly isolated on the international stage under Mr Trump. The president is disdainful of multilateralism, which irritates many of his contemporaries in the West but plays well with his support base in the US. He has been warmest to Asian and Middle Eastern leaders of an authoritarian bent and has looked ill at ease among the G20. The president's unpredictability and impulsiveness will cause some allies, notably Germany and Canada, to strengthen other ties as insurance against US insularity.

The US and China are engaged in a bilateral trade war, which we expect to continue for several years. After having imposed tariffs on imports of Chinese steel and aluminium (in March) and on US$50bn worth of manufactured goods and components (in June and August), the Trump administration has implemented a 10% tariff on a further US$200bn worth of Chinese imports. In response to the latest escalation, China has imposed tariffs on US$60bn worth of US goods, and now taxes nearly 85% of its total imports from the US. The 10% tariff rate set by the US is set to increase to 25% in January 2019 unless the two sides reach an agreement in ongoing trade talks. However, we expect progress to be minimal, owing in part to divisions within the Trump administration over the main trade priorities. The administration is likely to introduce tariffs on the majority of its remaining imports from China in the coming months, at which point the conflict will shift to non-tariff barriers such as investment restrictions and red tape. In the long term, the US and China will continue to compete for geopolitical influence, especially in Asia, where China's economic and diplomatic clout will grow.

A three-party trade deal, the United States-Mexico-Canada Agreement (USMCA), was reached in late September. This will replace the North American Free-Trade Agreement (NAFTA) and ease investors' short-term concerns over trade policy volatility in North America. The US's earlier threat to move forward with a bilateral deal that excluded Canada, and its attempt to impose a tight deadline for approval, have put strain on this strategic relationship. However, we expect the USMCA to be universally approved in early 2019, in part given the fact that the deal differs only modestly from NAFTA, and given the economic importance to all three countries.

Mr Trump will continue working to advance denuclearisation efforts on the Korean peninsula, seeing this as an opportunity to cement his legacy as a statesman. He will attempt to move the talks forward through personal diplomacy with the North Korean chairman, Kim Jong-un, after recent staff-level efforts stalled. However, efforts to denuclearise the peninsula would take years, and we doubt whether the trust required on both sides to enable this process can be established. Consequently, we are doubtful that any US-North Korea agreement forged in 2018 will survive in the long term.

There is a risk that Mr Trump will adopt a more aggressive foreign policy stance in 2019-20, in order to distract from new domestic challenges—including a strengthened Democratic opposition in Congress and a forecast economic slowdown in 2020. Iran would be one potential target of the US's ire, particularly following the reimposition of sanctions on the country in November. We will continue to flag this as a negative security risk.

Policy trends Policymaking will be slow and largely unproductive during the remainder of the Trump administration. Even prior to the 2018 mid-term elections, Congress had repeatedly struggled to agree the basic (if administratively complicated) matter of keeping the government funded; two brief shutdowns have occurred already in 2018, and further closures in the forecast period are likely. The highly partisan issue of immigration reform is also unlikely to be resolved. Democrats insist that so­called Dreamers—people who were brought illegally to the US as children—be granted a path to citizenship, and are willing to countenance a tightening of immigration in exchange, but Republicans do not have a unified position. Infrastructure spending is one potential area of bipartisan agreement, but the funding will be hard to come by. Mr Trump will also continue to pursue one of his most successful ventures thus far: deregulation, especially in the financial, energy and environmental sectors.

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Fiscal policy Following the agreement on significantly higher spending caps in 2019, we forecast that the fiscal deficit will widen to 5% of GDP, up from 3.8% in 2018 (this is lower than our previous deficit forecast, of 5.7% in 2019, but this is entirely due to a lower base effect in 2018). We forecast that federal government spending as a share of GDP will rise to 21% in both 2019 and 2020, from 20.3% in 2018. The peak will come in 2020 as slower revenue growth and continued fiscal stimulus push the deficit up to 5.9% of GDP. Thereafter, we expect the government to exercise greater spending constraint; however, we expect the deficit to remain relatively high, at an average of 4.8% of GDP in 2021-23, as the tax cuts implemented in 2017 weigh on fiscal revenue.

The need to approve public spending and raise the debt ceiling will cause regular partisan stand- offs in Congress as the Democrats use these as leverage with the administration. The global financial consequences of missing a debt payment would be enormous, but the chance of a default on US Treasury debt is remote. Were talks to fail, the government would prioritise debt servicing over other spending.

The long­term outlook for fiscal health is troubling. Structural shifts—such as the retirement of baby boomers, an increase in federal subsidies for health insurance, an ageing population and higher interest rates on the federal debt—will push up the deficit and the debt/GDP ratio unless taxes are raised or essential services cut back.

Monetary policy The Federal Reserve (Fed, the central bank) continues to pursue a path of gradual monetary tightening, given evidence that the economy can cope with rising interest rates. The Fed kept rates unchanged at its November meeting; in the light of recent strong economic data and robust job creation, this makes a fourth rate increase highly likely in December. We expect only three rate rises in 2019 as rising trade barriers begin to dampen business sentiment. The business cycle is then likely to turn—in part as rising import costs and weaker export competitiveness weigh on activity in US agriculture and manufacturing—which will cause the central bank to begin cutting rates, taking the policy rate back down to 2.25-2.5% by end-2020. We had previously expected aggressive rate rises by the Fed to cause the business-cycle downturn in 2020; however, we now expect the Fed to take a more cautious approach as the US-China trade war escalates and the economy reaches the height of the growth cycle, raising fears of a downturn. As the economy enters a modest recovery, we expect one rate rise per year in 2021-22 and two in 2023.

The Fed is engaging in another form of monetary tightening by shrinking its balance sheet. The value of its assets rose from US$870bn in mid-2008 to US$4.4trn in mid-2014 owing to its post- financial crisis quantitative easing (QE) programme. This helped to keep US bond yields at historically low levels. Selling (or not reinvesting) expiring assets should help to "normalise" the bond market. Since late 2017 the Fed has allowed a portion of its bonds to expire without being reinvested, similar to its QE tapering in 2013-14. This gradualist approach should avoid interfering with its short-term interest-rate policy.

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International assumptions 2018 2019 2020 2021 2022 2023

Economic growth (%)

Japan GDP 1.2 1.4 0.5 1.2 1.0 0.8

EU28 GDP 2.1 1.9 1.7 1.8 1.8 1.7

OECD GDP 2.3 2.0 1.5 1.9 2.0 1.9

World GDP 3.6 3.5 3.4 3.6 3.7 3.5

World trade 4.0 3.7 3.0 4.0 3.7 3.9

Inflation indicators (% unless otherwise indicated)

Japan CPI 1.0 1.8 2.4 1.3 1.2 1.2

EU28 CPI 1.9 1.9 1.8 1.8 1.9 1.9

OECD CPI 2.5 2.5 2.0 2.0 2.0 2.0

Manufactures (measured in US$) 6.3 3.6 3.0 2.4 3.6 2.9

Oil (Brent; US$/b) 75.2 76.8 70.8 74.8 77.4 76.1

Non-oil commodities (measured in US$) 2.4 -0.1 2.6 1.6 1.3 0.9

Financial variables

¥ 2­month private bill rate (%) 0.1 0.2 0.2 0.2 0.2 0.2 € 3­month rate (%) -0.2 -0.1 0.4 0.9 1.4 1.9 US$:€ (av) 1.18 1.19 1.21 1.21 1.24 1.24

Economic growth Real GDP growth remained relatively firm in the third quarter, at 3.5%, according to initial estimates. The slowdown from 4.2% growth seen in the second quarter was due to higher base effects in the same period last year, as well as opportunistic purchases of US exports in the second quarter (prior to the imposition of tariffs). However, we expect the pace of growth to moderate further in the fourth quarter as trade tariffs start to weigh on business investment and as the impact of the 2017 tax cuts starts to wear off, bringing the full-year average to 2.9%.

In 2019 the economy will increasingly show signs of strain. Regular interest-rate rises and inflationary pressures will begin to reduce households' purchasing power. The recent escalation in the US-China trade war will raise input costs for US firms and weaken their competitiveness in export markets. Uncertainty over the future of US trade policy will also act as a deterrent to some firms' long-term investment, including in new manufacturing facilities. The labour market is forecast to remain strong, with average unemployment of 4%. Nonetheless, as consumer spending and business investment—two key engines of US growth—start to moderate, we expect real GDP growth to slow to 2.2% next year.

In 2020 we expect the combined effect of trade barriers, higher interest rates and rising corporate and household debt to push the economy into a cyclical slowdown. We expect growth to slump to 1.3% over the full year as the Fed responds to weakening business sentiment with a more cautious approach to rate increases in 2019. The economy will make a gradual recovery in 2021-23, growing by an average of 1.9% per year, on the assumption that the next administration eases some import tariffs in order to improve US companies' external competitiveness.

Economic growth % 2018a 2019b 2020b 2021b 2022b 2023b

GDP 2.9 2.2 1.3 1.7 2.0 1.9

Private consumption 2.7 2.2 1.3 2.0 2.3 2.3

Government consumptionc 1.6 2.3 1.5 0.9 0.8 0.7

Gross fixed investment 5.4 2.3 -0.5 2.2 2.4 2.1

Exports of goods & services 4.2 2.4 1.5 2.8 3.4 3.5

Imports of goods & services 4.0 2.9 0.4 2.8 3.1 3.6

Domestic demand 2.9 2.3 1.1 1.8 2.1 2.0

Agriculture 2.5 4.0 3.0 2.6 3.0 2.4

Industry 2.4 2.0 0.6 1.0 1.1 0.8

Services 3.0 2.2 1.5 1.9 2.2 2.1 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Seasonally adjusted annual

rate.

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Inflation We expect consumer price inflation to accelerate to just over 2.6% in 2018 as the US-China trade war pushes up domestic prices of both components and finished goods. However, falling unemployment so far in 2018 has had only a modest impact on wage growth, and this will help to prevent faster inflation. Despite the unemployment rate falling from 6.6% at the start of 2014 to 3.7% in October 2018, nominal wage growth has only recently begun to accelerate (reaching 3.1% year on year in October). This suggests that there has been a structural decline in unemployment, which explains the delay between falling joblessness and the emergence of wage pressure. We expect inflation to average 2.4% in 2019 as trade tariffs maintain upward pressure, before slowing to 1.6% in 2020 as domestic demand softens. Inflation will pick up slightly in 2021-23, mainly reflecting higher petrol prices.

Exchange rates Following a stronger than expected performance in the euro zone in the first quarter, the euro appreciated against the dollar, touching US$1.25:€1 in early 2018. However, this phase of dollar weakness began to reverse course in May, and we expect the strong US economic fundamentals, as well as increasing concern over the impact of rising trade barriers outside the US, to support the dollar in the first half of 2019. We forecast renewed dollar depreciation in late 2019 and 2020 while the Fed eases monetary policy as growth weakens.

Although yield differentials will favour the dollar in 2018-19, the currency remains vulnerable to a number of risks, such as disappointing domestic economic growth and possible shocks emanating from erratic policymaking.

External sector Despite the recent increase in tariffs, we expect the current account to remain in deficit as the strong dollar (by historical standards) and structural imbalances, such as the shift of low-cost manufacturing to Asia and Latin America, ensure a wide trade deficit. The structural current- account deficit has narrowed, as higher oil and gas production has reduced the dependence on energy imports. Nevertheless, as the world's largest oil consumer, the US will remain a net importer. We expect demand for imports of goods and services to cool slowly as the dollar weakens and interest rates rise, and will stagnate in 2020 as the economy experiences a mild recession. Import growth will accelerate in 2021-23 as domestic demand recovers.

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Forecast summary Forecast summary (% unless otherwise indicated)

2018a 2019b 2020b 2021b 2022b 2023b

Real GDP growth 2.9 2.2 1.3 1.7 2.0 1.9

Gross fixed investment growth 5.4 2.3 -0.5 2.2 2.4 2.1

Industrial production growth 3.9 2.7 0.2 1.6 1.9 1.8

Unemployment rate (av) 3.9 4.0 4.6 4.4 4.3 4.8

Consumer price inflation (av) 2.6 2.4 1.6 1.8 1.7 1.8

Consumer price inflation (end-period) 2.7 2.0 1.7 1.8 1.8 1.8

US$ 3-month commercial paper rate 2.1 2.9 2.5 2.6 2.9 3.2

Fed funds target rate (end-period) 2.4 3.1 2.4 2.6 2.9 3.4

Federal government budget balance (% of GDP)c -3.8 -5.0 -5.9 -5.2 -4.6 -4.5

Exports of goods fob (US$ bn) 1,681 1,759 1,796 1,884 2,007 2,127

Imports of goods fob (US$ bn) 2,584 2,728 2,730 2,850 2,983 3,124

Current-account balance (US$ bn) -517 -594 -565 -620 -606 -628

Current-account balance (% of GDP) -2.5 -2.8 -2.6 -2.7 -2.6 -2.6

Exchange rate US$:€ (av) 1.18 1.19 1.21 1.21 1.24 1.24 Exchange rate US$:€ (end­period) 1.15 1.21 1.20 1.22 1.25 1.24 Exchange rate ¥:US$ (av) 110.1 110.9 108.6 104.9 100.5 96.1 a Economist Intelligence Unit estimates. b Economist Intelligence Unit forecasts. c Federal government,

financial year (October-September).

Quarterly forecasts Quarterly forecasts 2018 2019 2020

1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr

GDP

% change, quarter on quarter 2.2 4.2 3.5 2.5 1.7 1.6 1.8 1.6 -0.8 1.5 3.0 3.7

% change, year on year 2.6 2.9 3.0 3.1 2.9 2.3 1.9 1.7 1.1 1.0 1.3 1.9

Private consumption

% change, quarter on quarter 0.5 3.8 4.0 2.8 1.5 1.5 1.6 1.5 -0.8 1.6 3.0 3.7

% change, year on year 2.4 2.6 3.0 2.8 3.0 2.4 1.9 1.5 0.9 1.0 1.3 1.9

Government consumption

% change, quarter on quarter 1.5 2.5 3.3 -0.2 2.8 2.7 2.9 2.8 -1.2 1.2 2.6 3.1

% change, year on year 0.7 1.3 2.4 1.8 2.1 2.1 2.0 2.8 1.8 1.4 1.4 1.4

Gross fixed investment

% change, quarter on quarter 9.8 -1.9 14.2 -1.1 4.0 0.5 1.9 1.3 -2.0 -1.1 2.9 2.7

% change, year on year 5.2 5.8 5.0 5.6 3.8 2.3 2.6 0.7 -0.3 -0.7 -0.7 -0.5

Exports of goods & services

% change, quarter on quarter 3.6 9.3 -3.5 2.4 3.1 3.0 3.1 3.0 -1.2 1.1 2.5 3.3

% change, year on year 4.3 5.7 3.9 2.8 2.7 1.2 2.9 3.0 1.9 1.5 1.3 1.4

Imports of goods & services

% change, quarter on quarter 3.0 -0.6 9.1 -6.2 5.0 4.9 5.0 4.8 -4.0 -1.7 -0.3 0.4

% change, year on year 4.9 4.2 5.7 1.2 1.7 3.0 2.0 4.9 2.6 0.9 -0.4 -1.4

Domestic demand

% change, quarter on quarter 2.3 2.5 5.7 1.6 2.2 1.5 1.9 1.6 -1.1 1.0 2.9 3.4

% change, year on year 2.7 2.7 3.3 3.0 3.0 2.7 1.8 1.8 1.0 0.9 1.1 1.6

Consumer prices

% change, quarter on quarter 0.9 0.4 0.5 1.1 0.5 0.5 0.4 0.5 0.2 -0.1 1.1 1.0

% change, year on year 2.3 2.6 2.6 2.9 2.6 2.6 2.6 1.9 1.5 1.0 1.7 2.2

Producer prices

% change, quarter on quarter 0.8 0.8 0.3 0.5 0.6 0.5 0.5 0.6 0.1 0.1 0.1 0.1

% change, year on year 2.8 3.0 2.9 2.5 2.3 2.0 2.2 2.3 1.8 1.4 0.9 0.4

Exchange rate US$:€ (av) Average 1.23 1.19 1.16 1.21 1.16 1.18 1.20 1.21 1.19 0.00 0.00 0.00

Interest rates (%; av)

Fed funds target rate (end-period) 1.6 1.9 2.1 2.4 2.6 2.9 3.1 3.1 2.6 2.6 2.4 2.4

Long-term bond yield 2.8 2.9 2.9 3.4 3.4 3.4 3.5 3.7 3.4 2.1 1.9 1.9

Note. For GDP and its components, % change quarter-on-quarter figures are annualised growth rates.

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Data and charts

Annual data and forecast 2014a 2015a 2016a 2017a 2018b 2019c 2020c

GDP

Nominal GDP (US$ bn) 17,522 18,219 18,707 19,485 20,288 21,099 21,914

Real GDP growth (%) 2.5 2.9 1.6 2.2 2.9 2.2 1.3

Expenditure on GDP (% real change)

Private consumption 2.9 3.7 2.7 2.5 2.7 2.2 1.3

Government consumption -0.9 1.9 1.4 -0.1 1.6 2.3 1.5

Gross fixed investment 6.3 3.4 1.7 4.8 5.4 2.3 -0.5

Exports of goods & services 4.3 0.6 -0.1 3.0 4.2 2.4 1.5

Imports of goods & services 5.1 5.5 1.9 4.6 4.0 2.9 0.4

Origin of GDP (% real change)

Agriculture 0.5 6.7 4.3 -4.8 2.5 4.0 3.0

Industry 1.6 2.1 -0.3 1.7 2.4 2.0 0.6

Services 2.5 2.9 1.9 2.2 3.0 2.2 1.5

Population and income

Population (m) 318.8 321.3 323.9 326.5 329.2 331.9 334.6

GDP per head (US$ at PPP) 54,956 56,698 57,758 59,683 61,629 63,579 65,503

Recorded unemployment (av; %) 6.2 5.3 4.9 4.4 3.9 4.0 4.6

Fiscal indicators (% of GDP)

Public-sector balanced -2.8 -2.4 -3.2 -3.5 -3.8 -5.0 -5.9

Public-sector debt interest payments 1.3 1.2 1.3 1.4 1.4 1.8 2.0

Public-sector primary balance -1.5 -1.2 -1.9 -2.1 -2.4 -3.2 -3.8

Net public debt 73.7 72.5 76.2 76.1 76.3 78.7 82.1

Prices and financial indicators

Exchange rate US$:€ (average) 1.33 1.11 1.11 1.13 1.18 1.19 1.21 Consumer prices (average; %) 1.6 0.1 1.3 2.1 2.6 2.4 1.6

Producer prices (av; %) 1.6 -0.9 0.4 2.3 2.8 2.2 1.1

Stock of money M1 (% change) 10.4 7.3 7.6 8.0 9.6 6.1 5.3

Stock of money M2 (% change) 6.2 5.8 6.8 5.6 9.8 8.2 6.1

Fed funds target rate (end-period: %) 0.1 0.4 0.6 1.4 2.4 3.1 2.4

Current account (US$ bn)

Trade balance -750 -762 -751 -807 -903 -969 -934

Goods: exports fob 1,636 1,511 1,457 1,553 1,681 1,759 1,796

Goods: imports fob -2,385 -2,273 -2,208 -2,361 -2,584 -2,728 -2,730

Services balance 260 263 249 255 282 280 279

Primary income balance 218 204 193 222 230 227 228

Secondary income balance -94 -113 -124 -119 -126 -133 -138

Current-account balance -365 -408 -433 -449 -517 -594 -565

International reserves (US$ bn)

Total international reserves 130 118 117 123 – – – a Actual. b Economist Intelligence Unit estimates. c Economist Intelligence Unit forecasts. d Federal

government, financial year (October-September). Source: IMF, International Financial Statistics.

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Quarterly data 2016 2017 2018

4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr

Federal government finance (US$ bn)

Revenue 740.8 732.4 1034.7 807.1 769.5 727.5 1043.8 787.9

Expenditure 950.6 1049.4 1030.9 949.8 994.5 1102.2 1051.2 959.8

Balance -209.8 -317.0 3.8 -142.7 -225.0 -374.7 -7.4 -171.9

Outputa

GDP at current prices (annualised; US$ bn) 18,979 19,163 19,359 19,588 19,832 20,041 20,41220,659

GDP at chained 2005 prices (annualised; US$

bn) 17,784 17,863 17,995 18,121 18,224 18,324 18,51218,672

GDP at chained 2005 prices (% change, year

on year) 1.9 1.9 2.1 2.3 2.5 2.6 2.9 3.0

Industrial production index (2012=100) 102.2 102.5 103.7 103.3 105.3 105.9 107.3 108.2

Industrial production (% change, year on year) -0.6 0.2 2.0 1.3 3.0 3.4 3.5 4.7

Employment, wages and pricesa

Employment (m) 152.1 152.6 153.1 153.8 153.9 154.9 155.4 155.8

Unemployment actual (m) 7.56 7.43 6.94 6.95 6.57 6.66 6.33 6.16

Unemployment rate (%) 4.7 4.7 4.3 4.3 4.1 4.1 3.9 3.8

Average hourly earnings (US$) 21.7 21.9 22.0 22.1 22.2 22.4 22.6 n/a

Consumer prices (1982-84=100) 242.2 243.9 244.0 245.3 247.3 249.4 250.5 n/a

Consumer prices (% change, year on year) 1.8 2.6 1.9 2.0 2.1 2.3 2.6 n/a

Producer prices, finished goods (1982=100) 111.1 112.0 112.6 113.1 114.2 115.1 116.0 n/a

Producer prices (% change, year on year) 1.4 2.0 2.2 2.4 2.8 2.8 3.0 n/a

Financial indicators

Exchange rate ¥:US$ (end­period) 116.8 111.4 112.4 112.6 112.7 106.2 110.7 n/a Exchange rate US$:€ (end­period) 1.05 1.07 1.14 1.18 1.20 1.23 1.17 n/a Exchange rate US$:£ (end­period) 1.23 1.25 1.30 1.34 1.35 1.40 1.32 n/a Fed funds target rate (end-period; %) 0.63 0.88 1.13 1.13 1.38 1.63 1.88 2.13

10-year Treasury bond rate (av; %) 2.13 2.44 2.26 2.24 2.37 2.76 2.92 2.93

M1 (US$ bn, period average) 3,347 3,401 3,495 3,549 3,603 3,627 3,670 3,696

M1 (% change, year on year) 9.0 8.8 7.8 7.9 7.7 6.7 5.0 4.2

M2 (US$ bn, period average) 13,184 13,346 13,498 13,630 13,814 13,896 14,03314,167

M2 (% change, year on year) 7.3 6.3 5.9 5.4 4.8 4.1 4.0 3.9

S&P 500 share price index (1941-43=10)b 2,239 2,363 2,423 2,519 2,674 2,641 2,718 2,914

S&P 500 share prices (% change, year on

year)b 9.5 14.7 15.5 16.2 19.4 11.8 12.2 15.7

Sectoral trendsa

New orders: manufacturing (US$ bn)a 1,346.51,360.81,389.41,398.61,438.31,469.21,496.4 n/a

Housing starts, private (‘000) 314.0 307.0 293.0 294.0 315.0 330.0 315.0 n/a

Foreign trade (US$ bn)a

Exports fas 369.5 379.3 380.9 386.2 399.9 409.3 427.3 420.0

Imports cv -560.3 -574.4 -577.7 -580.0 -609.8 -627.4 -627.3 -643.7

Trade balance -190.8 -195.1 -196.8 -193.9 -209.9 -218.1 -200.0 -223.6

Foreign payments (US$ bn)

Merchandise trade balancea -194.0 -198.3 -199.9 -196.8 -212.4 -220.8 -203.2 n/a

Services balancea 61.1 63.4 63.2 64.0 64.6 66.8 69.3 n/a

Primary income balancea 56.1 52.6 48.5 58.2 62.4 61.2 60.8 n/a

Net transfer paymentsa -31.8 -25.4 -33.7 -28.9 -30.7 -28.9 -28.5 n/a

Current-account balancea -108.6 -107.7 -121.8 -103.4 -116.1 -121.7 -101.5 n/a

Reserves excl gold (end-period) 106.3 107.8 111.0 112.8 112.3 115.3 114.1 112.7 a Seasonally adjusted. b Standard and Poor’s 500 composite index; end­period. Sources: Government Printing Office, Economic Indicators; Department of the Treasury, Monthly Treasury Statement; IMF,

International Financial Statistics.

Monthly data Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Exchange rate US$:€ (end­period) 2016 1.09 1.09 1.14 1.14 1.12 1.11 1.11 1.11 1.12 1.09 1.06 1.05

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2017 1.08 1.06 1.07 1.09 1.12 1.14 1.17 1.18 1.18 1.16 1.18 1.20

2018 1.25 1.22 1.23 1.21 1.17 1.17 1.17 1.17 n/a n/a n/a n/a

LIBOR rate on 3-month deposits (%)

2016 0.6 0.6 0.6 0.6 0.6 0.7 0.7 0.8 0.9 0.9 0.9 1.0

2017 1.0 1.0 1.1 1.2 1.2 1.3 1.3 1.3 1.3 1.4 1.4 1.6

2018 1.7 1.9 2.2 2.3 2.3 2.3 2.3 2.3 2.3 2.5 n/a n/a

Prime lending rate on short-term loans (%)

2016 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.5 3.6

2017 3.8 3.8 3.9 4.0 4.0 4.1 4.3 4.3 4.3 4.3 4.3 4.4

2018 4.5 4.5 4.6 4.8 4.8 4.9 5.0 5.0 5.0 5.3 n/a n/a

Fed funds target rate (end-period; %)

2016 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.38 0.63

2017 0.63 0.63 0.88 0.88 0.88 1.13 1.13 1.13 1.13 1.13 1.13 1.38

2018 1.38 1.38 1.63 1.63 1.63 1.88 1.88 1.88 2.13 2.13 2.13 n/a

Budget revenue (US$ bn)

2016 313.6 169.1 227.8 438.4 224.6 329.6 210.0 231.3 356.6 221.7 199.9 319.2

2017 344.1 171.7 216.6 455.6 240.4 338.7 232.0 226.3 348.7 235.3 208.4 325.8

2018 361.0 155.6 210.8 510.4 217.1 316.3 225.3 219.1 343.6 n/a n/a n/a

Budget expenditure (US$ bn)

2016 258.4 361.8 335.9 332.0 277.1 323.3 322.8 338.4 323.2 267.5 336.5 346.5

2017 292.8 363.8 392.8 273.2 328.8 428.9 275.0 334.0 340.8 298.6 346.9 349.0

2018 311.8 370.9 419.6 296.2 363.9 391.1 302.1 433.3 224.4 n/a n/a n/a

Budget balance (US$ bn)

2016 55.2 -192.6 -108.0 106.5 -52.5 6.3 -112.8 -107.1 33.4 -45.8 -136.7 -27.3

2017 51.3 -192.0 -176.2 182.4 -88.4 -90.2 -42.9 -107.7 7.9 -63.2 -138.5 -23.2

2018 49.2 -215.2 -208.7 214.3 -146.8 -74.9 -76.9 -214.1 119.1 n/a n/a n/a

M1 (% change, year on year)

2016 5.2 4.0 5.2 6.6 8.8 7.6 6.9 9.9 9.4 10.6 8.9 7.7

2017 9.5 8.0 9.0 7.3 8.2 8.0 9.0 7.6 7.1 7.8 7.7 7.5

2018 7.3 6.3 6.3 6.3 4.4 4.3 4.0 3.9 4.6 n/a n/a n/a

M2 (% change, year on year)

2016 6.1 5.7 6.1 6.5 6.8 6.9 7.0 7.3 7.3 7.5 7.3 7.1

2017 6.5 6.2 6.3 6.1 5.9 5.6 5.7 5.3 5.2 5.0 4.6 4.7

2018 4.2 4.1 4.0 3.8 3.9 4.2 3.9 4.0 3.9 n/a n/a n/a

Industrial production (seasonally adjusted; % change, year on year)

2016 -2.7 -2.9 -3.4 -2.8 -2.4 -1.7 -2.0 -1.9 -1.7 -1.3 -0.9 0.5

2017 -0.5 -0.1 1.2 2.0 2.1 1.9 1.5 1.1 1.3 2.6 3.4 2.9

2018 2.8 3.6 3.6 3.9 3.0 3.6 4.1 4.8 5.1 n/a n/a n/a

Retail sales volume (seasonally adjusted; % change, year on year)

2016 3.8 6.3 4.6 4.3 4.3 5.0 4.7 4.4 4.3 4.4 4.1 3.6

2017 4.3 2.5 3.4 3.9 3.9 3.7 3.6 3.1 3.9 4.6 4.9 4.4

2018 3.2 3.5 4.0 3.5 4.1 3.9 4.2 4.7 3.8 n/a n/a n/a

Stockmarket index (S&P 500, 1941-43=10)

2016 1,940 1,932 2,060 2,065 2,097 2,099 2,174 2,171 2,168 2,126 2,199 2,239

2017 2,279 2,364 2,363 2,384 2,412 2,423 2,470 2,472 2,519 2,575 2,648 2,674

2018 2,824 2,714 2,641 2,648 2,705 2,718 2,816 2,902 2,914 2,712 n/a n/a

Consumer prices (% change, year on year)

2016 1.3 1.0 0.9 1.1 1.0 1.0 0.9 1.1 1.5 1.6 1.7 2.1

2017 2.5 2.8 2.4 2.2 1.9 1.6 1.7 2.0 2.2 2.0 2.2 2.1

2018 2.1 2.3 2.4 2.4 2.7 2.8 2.9 2.7 2.3 n/a n/a n/a

Consumer price index excl food and energy (seasonally adjusted; 1982-84=100)

2016 245.1 245.7 246.0 246.5 247.0 247.4 247.8 248.4 248.7 249.1 249.5 250.0

2017 250.7 251.1 250.9 251.1 251.3 251.7 252.1 252.6 252.9 253.5 253.8 254.4

2018 255.3 255.8 256.2 256.5 256.9 257.3 257.9 258.1 n/a n/a n/a n/a

Price index for personal consumption expenditure excl food and energy (2000=100, % change,

year on year)

2016 1.5 1.6 1.5 1.6 1.6 1.6 1.7 1.8 1.7 1.9 1.8 1.9

2017 1.9 1.9 1.6 1.6 1.6 1.6 1.5 1.4 1.5 1.6 1.6 1.6

2018 1.6 1.7 2.0 1.9 2.0 2.0 2.0 2.0 n/a n/a n/a n/a

Producer prices (seasonally adjusted; % change, year on year)

2016 -0.1 0.1 -0.1 0.2 0.0 0.2 0.1 0.0 0.7 1.2 1.2 1.7

2017 1.8 2.0 2.2 2.5 2.3 1.9 2.0 2.5 2.5 2.7 3.0 2.6

2018 2.6 2.9 2.9 2.7 3.1 3.3 3.2 2.8 2.7 2.9 n/a n/a

Unemployment rate (seasonally adjusted; %)

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2016 4.9 4.9 5.0 5.0 4.7 4.9 4.9 4.9 5.0 4.9 4.6 4.7

2017 4.8 4.7 4.5 4.4 4.3 4.3 4.3 4.4 4.2 4.1 4.1 4.1

2018 4.1 4.1 4.1 3.9 3.8 4.0 3.9 3.9 3.7 3.7 n/a n/a

Average hourly wages (seasonally adjusted; % change, year on year)

2016 2.4 2.4 2.5 2.6 2.3 2.4 2.6 2.4 2.6 2.4 2.4 2.5

2017 2.3 2.4 2.2 2.2 2.3 2.3 2.2 2.3 2.6 2.2 2.3 2.4

2018 2.4 2.5 2.6 2.6 2.7 2.8 2.8 2.9 2.8 3.2 n/a n/a

Total exports fas (US$ bn; seasonally adjusted)

2016 116.3 118.4 117.5 119.4 119.9 120.3 121.8 123.5 124.4 122.8 121.2 125.5

2017 126.1 126.6 126.6 126.3 126.6 128.1 127.9 128.1 130.2 130.3 133.5 136.1

2018 133.0 136.0 140.3 140.6 144.2 142.5 140.2 138.5 141.3 n/a n/a n/a

Total imports cv (US$ bn; seasonally adjusted)

2016 177.9 182.8 174.2 177.0 179.9 184.2 183.5 184.3 183.6 184.7 186.6 189.0

2017 192.7 191.0 190.7 192.6 192.3 192.9 192.4 192.6 195.1 198.0 203.3 208.5

2018 206.6 211.9 208.9 208.0 208.9 210.4 212.3 213.9 217.6 n/a n/a n/a

Trade balance fas-cv (US$ bn; seasonally adjusted)

2016 -61.6 -64.4 -56.6 -57.5 -59.9 -63.9 -61.7 -60.8 -59.2 -61.8 -65.5 -63.5

2017 -66.6 -64.4 -64.2 -66.3 -65.7 -64.8 -64.5 -64.5 -64.9 -67.6 -69.8 -72.4

2018 -73.6 -76.0 -68.5 -67.4 -64.7 -67.9 -72.0 -75.4 -76.3 n/a n/a n/a

Foreign-exchange reserves excl gold (US$ bn)

2016 106.1 106.2 108.7 110.0 108.1 109.2 109.4 109.3 111.4 110.0 107.2 106.3

2017 108.1 107.2 107.8 109.0 110.7 111.0 112.6 113.5 112.8 111.6 112.4 112.3

2018 115.2 114.7 115.3 113.5 111.8 114.1 113.7 113.5 112.7 n/a n/a n/a Sources: IMF, International Financial Statistics; Haver Analytics.

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Annual trends charts

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Quarterly trends charts

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Monthly trends charts

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Comparative economic indicators

Basic data

Land area

9,161,923 sq km

Population

326.5m (2017 estimate)

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Main urban centres (incl suburbs)

Population in millions (July 1st 2013 Census Bureau estimates)

New York: 19.9

Los Angeles: 13.1

Chicago: 9.5

Dallas-Fort Worth: 6.8

Houston: 6.3

Philadelphia: 6.0

Washington DC: 5.9

Miami: 5.8

Climate

Mainly temperate; subtropical in the South

Weather in Washington, DC (altitude 22 metres)

Hottest month, July, 21­31°C; coldest month, January, –3­6°C; driest month, February, 69 mm average rainfall; wettest month, August, 99 mm average rainfall

Language

English

Measures

Previous UK (imperial) system, except

US gallon = 0.833 UK gallon

US bushel = 0.969 UK bushel

US short ton = 2,000 lb

Currency

Dollar (US$) = 100 cents

Average exchange rate in 2017: US$1.13:€1

Time

Hours behind GMT

Eastern zone: 5

Central zone: 6

Mountain zone: 7

Pacific zone: 8

Hawaii: 10

Alaska: Hyder: 8

Aleutian Islands west of 169.30°W: 10

St Lawrence Island: 10

Rest of Alaska: 9

Fiscal year

The federal government fiscal year, for example for 2016, runs from October 1st 2015 to September

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30th 2016. State and local fiscal years can differ

Holidays in 2018

New Year's Day (January 1st); Birthday of Martin Luther King, Jr (January 15th); President's Day (February 19th); Memorial Day (May 28th); Independence Day (July 4th); Labor Day (September 3rd); Columbus Day (October 8th); Veterans' Day (November 12th); Thanksgiving (November 22nd); Christmas Day (December 25th)

Political structure

Official name

United States of America

Form of state

Federal republic

Legal system

Based on the constitution of 1787

Federal legislature

Bicameral: Senate of 100 members directly elected on a plurality (first-past-the-post) system for a six-year term, with one-third of its seats up for election every two years; House of Representatives of 435 members directly elected on a plurality basis for a two-year term. The Senate has the power to confirm or reject presidential appointments, including the cabinet, and to ratify treaties; the House of Representatives has the sole right to initiate revenue bills, although they may be amended or rejected by the Senate

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Electoral system

Universal direct suffrage from the age of 18

National elections

The last elections were held on November 8th 2016 (president, House of Representatives and one- third of the Senate); the next congressional mid-term elections (House of Representatives and one-third of Senate) will be held in November 2018; the next presidential election will be held in November 2020

Head of state

Executive president elected by popular vote via an electoral college of 538 members, for a maximum of two four-year terms. Donald Trump (Republican) replaced Barack Obama (Democrat) as president on January 20th 2017, with Mike Pence as vice-president

State legislatures

Each of the 50 states, except Nebraska (which has a unicameral system), has a bicameral legislature that essentially follows the model of the federal legislature; the states have certain fiscal and legal rights; some states now limit the number of terms that can be served by their elected representatives

National government

The administration is appointed by and responsible to the president; its senior officials are subject to confirmation by the Senate

Cabinet secretaries

Agriculture: Sonny Perdue

Attorney-general: Jeff Sessions

Commerce: Wilbur Ross

Defence: James Mattis

Education: Betsey DeVos

Energy: Rick Perry

Health & human services: Alex Azar

Homeland security: Kirstjen Nielsen

Housing & urban development: Ben Carson

Interior: Ryan Zinke

Labour: Alexander Acosta

State: Mike Pompeo

Transportation: Elaine Chao

Treasury: Steven Mnuchin

Other offices with cabinet rank

Environmental Protection Agency: Andrew Wheeler

Office of Management & Budget: Mick Mulvaney

President's Chief of Staff: John Kelly

United States Trade Representative: Robert Lighthizer

Chairman of the Federal Reserve

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Jerome Powell

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Recent analysis Generated on November 20th 2018

The following articles have been written in response to events occurring since our most recent forecast was released, and indicate how we expect these events to affect our next forecast.

Politics

Forecast updates

Democrats outline pragmatic agenda for 2019-20

November 14, 2018: Election watch

Event

Democratic Party leaders said that their top legislative priorities would be to remove obstacles to voting in elections, close loopholes in the government ethics law and weaken the influence of big donors in US politics.

Analysis

Although the final results of the November 6th mid-term elections are still being tallied, the Democrats are expected to end up with a comfortable majority of 15-20 seats in the House of Representatives (the lower house), ending four years of Republican Party control. Even so, the Democrats will confront daunting obstacles in driving forward legislation. Many—if not most—of their initiatives are sure to face stiff resistance in the Senate, where, judging by preliminary mid- term results, the Republicans will hold 52-53 out of 100 seats. The president, Donald Trump, will also contribute to partisan tensions as he prepares his re-election bid for 2020.

If Democratic leaders hope to make progress on their agenda, they will also need to reconcile differences within their own caucus, whose members range from a fresh cohort of young, progressive activists to far more cautious and conservative southerners. Tensions surfaced even before the mid-term elections in a movement among activists to topple the party's senior leadership, including the current minority leader, Nancy Pelosi, who is 78. While some may vote against her, we expect that Ms Pelosi will regain her position as House speaker, in part given that no other candidate has so far mounted a serious challenge.

Ms Pelosi is a pragmatist, and her priority will be to build on the party's mid-term electoral success rather than push initiatives that risk deepening divisions or have little chance of becoming law. Thus, the issues of voting rights, government ethics and campaign finance will find wide support not only among Democrats but also among moderate Republicans. Elsewhere, Ms Pelosi has pledged to revive a House committee on climate change and to push for more infrastructure spending (one of Mr Trump's own priorities). Besides legislative initiatives, we expect Democrat- controlled committees to launch numerous investigations into Mr Trump's business affairs and alleged ethics violations, among other controversies swirling around the beleaguered president.

Impact on the forecast

We maintain our forecast that little meaningful legislation will be passed in 2019-20, owing to deep partisan divisions. Periodic battles on issues including government spending levels, healthcare provisions and immigration are likely. Beyond the Democrats' more pragmatic proposals, which are likely to find support, infrastructure spending is another potential area of compromise.

Economy

Analysis

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EIU global forecast - US foreign policy to harden

November 15, 2018: Summary

On November 6th the US mid-term elections were held in what was widely seen as a referendum on the presidency of Donald Trump. The results presented a mixed result for Mr Trump and his Republican Party. Republicans made gains in the Senate (the upper house of Congress) but lost seats in the House of Representatives (the lower house). As The Economist Intelligence Unit had expected, the swing in the House was large enough to hand control to the Democrats for the next two years. The Democrats are now likely to increase the pressure on the Trump administration in a number of areas, launching multiple investigations into the activities and business ties of Mr Trump and members of his administration. On November 7th Mr Trump removed Jeff Sessions as attorney-general and replaced him with Matthew Whitaker, who has previously stated his concerns over the investigation into potential links between Mr Trump and Russian government officials being carried out by Robert Mueller. In response, Nancy Pelosi, the House minority speaker, called for Mr Whitaker to recuse himself of the investigation, a move that Mr Sessions made in his time as attorney-general. Given his views, Mr Whitaker is unlikely to comply. As a result, we expect an escalation of conflict between the Democrats and Mr Trump, with the Democrats increasing the pressure on his administration and Mr Trump reinforcing his combative approach and heated rhetoric towards his adversaries.

Global stability set for period of uncertainty

This domestic gridlock will have implications for other countries. As well as increasing pressure from congressional Democrats, we expect that Mr Trump will have to contend with a slowing economy in 2019-20. In an effort to divert attention from these domestic concerns, we expect the Trump administration's approach to foreign policy to harden in the next two years—in terms of both rhetoric and action. Mr Trump will have greater freedom of manoeuvre in foreign policy than domestic policy, given the executive powers of the presidency and the Democrats' control of the House of Representatives. In particular, Mr Trump's pressure on Iran is likely to increase following the reimposition of sanctions on November 5th, and he may seek quick, decisive military victories—further US strikes on Syria remain a possibility in the event of chemical attacks in the country. In addition, we expect the Trump administration to continue to escalate the trade war with China. The US has already imposed additional tariffs on US$250bn-worth of Chinese imports, and the Chinese government has responded with higher tariffs on US$110bn-worth of US goods, as well as various non-tariff measures such as greater regulatory scrutiny of US companies operating in China. Based on threats made to date, we expect the Trump administration to move ahead with tariffs on the majority of the remaining Chinese imports that have yet to be covered in the dispute, amounting to about US$250bn. Further non-tariff measures on both sides are also likely.

Although US-China trade tensions have been fuelled by Mr Trump, they have deeper roots within the growing rivalry between the world's two largest powers. At the heart of the dispute between China and the US is a disagreement over intellectual property and China's technology transfer practices. This will make it very difficult for either side to give ground. We expect the global system to be characterised by competition between the major powers in the next five years, and the trade dispute is increasingly spilling into areas of political and security concern. On October 4th the US vice-president, Mike Pence, signalled a significant hardening of US strategy towards China. The most explosive allegations from Mr Pence's speech were that China was meddling in US politics ahead of the mid-term elections in November. However, the speech also addressed a number of larger issues, including the controversy over the Made in China 2025 initiative, the debt issues surrounding China's Belt and Road Initiative (BRI) and the campaign against Taiwan. Demonstrating this resolve, on October 22nd two US warships sailed through the Taiwan Strait, in a move that adds fuel to bilateral tensions. In a sign that the US will draw others into this rivalry, the revised North American Free-Trade Agreement (NAFTA), officially rebranded as the United States-Mexico-Canada Agreement (USMCA), contains a provision aimed at increasing the trade pressure on China. The USMCA casts a spectre over potential future trade deals between China, Canada and Mexico by stipulating that any party would have grounds to withdraw from the deal if another party were to enter into a free-trade agreement with a non-market economy (a term used by the US to describe China).

The world's other major power, Russia, is also expanding its global presence, presenting a

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challenge to the US's dominance of global security. The Russian president, Vladimir Putin, signed a US$5.4bn deal for the sale of S-400 Russian air-defence missile systems to India during a recent visit to the country. The deal is in line with our view that Russia will strive to be on the same level as the US in terms of its economic and security relationships, a process that risks increasing tensions in the region. This tension will also increase the security risk faced by European countries, a notion reinforced by US plans to leave the 1987 Intermediate-Range Nuclear Forces treaty. The agreement has been under scrutiny for some time; the US and its NATO allies have accused Moscow of violating the treaty over the past decade. However, previous US administrations have opted to remain in the treaty in the interests of preventing a renewed arms build-up, as well as to reassure European allies. The US's withdrawal plans confirm our view that US-Russian relations will worsen in the coming years.

US and Chinese growth will slow in 2019 owing to domestic and external factors

By 2019 we expect the trade war to dampen growth in both the US and China and to act as a drag on growth in the wider global economy. The trade war comes at a challenging time for the Chinese economy. Concerns over the strength of domestic demand have returned, as momentum in both private consumption and investment has weakened. Striking a sombre tone, on October 31st the 25-member politburo of the ruling Chinese Communist Party highlighted concerns about weakening economic activity. Whereas the previous politburo meeting, in July, focused on the challenges of the external environment, this meeting noted the "operational difficulties" of local companies and related financial risks. As we have been anticipating, in terms of stimulus the politburo called for a more proactive response for dealing with these headwinds. However, we continue to expect the extent of any stimulatory measures to be limited by financial stability concerns and a slowdown in real GDP growth, to 6.2% in 2019, from an estimated 6.6% this year. Although we expect growth to be maintained to reach the government's target of doubling real GDP this decade, the trade war has again raised the spectre of China's financial vulnerabilities, which will cloud the economy's outlook for the foreseeable future.

The trade war will also affect the US economy, which has so far had a stellar year in 2018. Real GDP growth surged to 4.2% on an annualised basis in the second quarter of 2018, from 2.2% in the first quarter. Some of the biggest gains came from private investment, which rose by 3.9%. In October a net number of 250,000 jobs were created, and wage growth continued to accelerate to 3.1%, the fastest annual gain since 2009. The labour market continues to go from strength to strength, underpinning the economy's momentum. However, the combination of the escalating trade dispute with China and monetary tightening by the Federal Reserve (the US central bank) will start to weigh on growth in 2019—we expect growth to slow in 2019 to 2.2%. The US manufacturing and agricultural sectors, in particular, will be hit by the trade dispute, and rising interest rates will cause private consumption to slow. Growth will continue to slow in 2020, to a low of 1.3%, as the lingering effects of the trade dispute, higher interest rates and softening corporate balance sheets result in a business-cycle slowdown. We expect a mild recovery as these effects unwind, with growth averaging 1.9% in 2021-23.

Financial market volatility will remain high in 2019-20

The US-China trade war and growing geopolitical tensions will add to the risks facing emerging markets, which have come under growing pressure since April as a result of a strengthening US dollar and tightening global liquidity conditions. Volatility in emerging-market currencies in recent months has fuelled fears of a full-blown emerging-market crisis, but among major emerging markets capital flight has so far only led to genuine currency crises in Turkey and Argentina, which are now both in recession. Nonetheless, the Turkish and Argentinian crises have intensified the sell-off in emerging-market assets more broadly. Further periods of market volatility are likely as a number of key trends—tightening monetary conditions, the global trade dispute, heightened geopolitical risk and, in many emerging markets, a significant increase in debt levels in recent years—interact in challenging ways. Domestic politics will also present an ongoing risk. In India, for instance, there is a risk of capital flight after an ugly spat between the government and the central bank over the bank's independence. The Mexican peso has slumped over infrastructure and energy concerns, after a controversial public consultation exercise led to the cancellation of a new airport in the capital, Mexico City, on October 29th. Our forecasts assume

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that financial markets will continue to discriminate between the bulk of emerging markets and the most vulnerable countries. However, we see a moderate risk (21-30% probability) that a souring of market sentiment towards emerging markets as an asset class could lead to a noticeable slowdown in emerging-market growth in 2019-20.

Our forecasts crucially assume that US monetary tightening will remain controlled and relatively gradual in 2019-20, with inflation picking up only modestly. However, there remains a risk that US inflation accelerates more than we expect, owing possibly to the trade war, causing interest rates and the dollar to rise above our current expectations. This could result in more widespread stress in financial markets. Financial markets may also prove more sensitive to interest-rate rises than we currently assume, with additional rate rises triggering falls in a wide range of asset prices. Financial markets remain vulnerable, as years of extraordinary monetary policy support, which kept interest rates extremely low, have forced investors to look elsewhere for attractive returns, pushing up the prices of bonds, stocks and property. The recent falls in US stock prices— reflecting trade jitters, rising bond yields, increasing costs and wage growth—are illustrative of the fragility of market sentiment. At this stage we see the stockmarket correction as an early sign of the peak in the US business cycle that we expect in 2019. However, we rate the likelihood of a sharp global slowdown brought about by a faster than expected increase in US interest rates as moderate.

World economy: Forecast summary

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Real GDP growth (%)

World (PPPa exchange rates) 3.5 3.4 3.2 3.7 3.6 3.5 3.4 3.6 3.7 3.6

World (market exchange rates) 2.8 2.8 2.4 3.0 3.0 2.7 2.5 2.7 2.8 2.7

US 2.5 2.9 1.6 2.2 2.9 2.2 1.3 1.7 2.0 1.9

Euro area 1.5 2.0 1.9 2.5 2.0 1.8 1.6 1.7 1.7 1.6

Europe 1.9 2.0 1.9 2.7 2.1 1.9 1.8 1.9 2.0 1.9

China 7.3 6.9 6.7 6.9 6.6 6.2 6.1 5.6 5.3 5.0

Asia and Australasia 4.1 4.3 4.1 4.5 4.4 4.3 4.0 4.1 4.1 4.0

Latin America 1.4 0.5 -0.4 1.2 1.2 2.0 2.4 2.7 2.7 2.7

Middle East & Africa 2.8 2.5 4.2 1.6 2.3 2.1 3.1 3.2 3.5 3.5

Sub-Saharan Africa 4.5 2.9 1.1 2.4 2.6 3.0 2.9 3.7 4.1 4.3

World inflation (%; av) 3.5 3.3 3.5 4.3 5.1 5.8 3.6 3.4 3.3 3.0

World trade growth (%) 3.1 2.2 2.3 5.3 4.0 3.4 2.8 3.9 3.7 3.9

Commodities

Oil (US$/barrel; Brent) 98.9 52.4 44.0 54.4 73.2 75.5 70.3 74.8 77.4 76.1

Industrial raw materials (US$; %

change) -5.1 -15.2 -2.2 20.2 2.8 0.0 -0.1 4.2 -0.5 0.4

Food, feedstuffs & beverages

(US$; % change) -5.2 -19.1 -3.6 -1.0 2.1 0.0 4.9 0.1 3.1 0.7

Exchange rates (av)

 ¥:US$ 105.9 121.0 108.8 112.1 110.1 111.4 108.6 104.9 100.5 96.1

 US$:€ 1.33 1.11 1.11 1.13 1.18 1.19 1.21 1.21 1.24 1.24

a PPP = purchasing power parity

Source: The Economist Intelligence Unit.

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