Jan 27, 2017 (San Diego) The. American economy grew at a sluggish 1.6 percent for 2016. This is the worst performance since 2011, which is when the country started to show signs it was coming out of the Great Recession. It is also worst than the expectations from the International Monetary Fund (IMF) which expected it to be at an ok rate of 2.4 percent.
This is significant at several levels. The first is that the economy is slowing down even faster than global, or national projections. The second is that it will likely slow even further. The first and most obvious is that there is a clear backlash against globalization, which both the BREXIT vote and the election of Donald Trump are a sign off.
There is also what the International Monetary Fund called a “synchronized slowdown.” This was reported by the Financial Times earlier in 2016. This is across multiple advanced and emerging economies, with places like Brazil showing negative growth.
The slowdown of the Chinese economy is also part of this. It signals the growing role of China in the global economy, which is quickly replacing the United States as the global engine. In other worlds, if China gets a cold, the rest of the world gets pneumonia.
There is more, the European Union as a political and economic project is starting to fray, which will also lead to European states looking inward, and perhaps the United Kingdom will only be the first to leave the EU. While Italy and Austria did not vote to leave, there is still quite a bit of distress and right wing nationalist parties are rising.
There is another aspect as to why the American economy is slowing down. The dollar is strong, which makes exports expensive for other countries. This slows down exports. Our economic growth for 2016 is near replacement for present jobs, if not bellow replacement. This will signal soon the beginning of a recession.
While the IMF expects the global economy to recover somewhat in 2017 with a global growth if 3.4 percent, given current conditions we think they are overly optimistic.
It is in their papers. According to the IMF there are reasons for the global slowdown:
- Weak economic activity, particularly investment, accounts for about three-fourths of the dramatic slowdown in the volume of trade since 2012
- Stalled trade liberalization, recent spike in protectionism, and slower dispersion of production across borders also holding back trade but to a lesser extent
- Trade volumes are likely to remain subdued unless growth and investment pick up; further trade reforms can also help
There are several causes for that. It is not just the inward turn by many economies, but the United States is now at risk of a trade war with its southern neighbor. The actions of the Trump administration, talking about a 20 percent tax on Mexican imports, that range from Coronas, to auto parts, clothing, minerals, and yes vehicles, has already triggered wide spread boycotts against US Companies in Mexico. This include the cancellation of orders for Ford Motor Company.
We expect to see a slowdown in Foreign Direct Investment (FDI) in both Mexico and the United States. FDI’s imply things like yes, Ford Motor Company building a plant in the state of Campeche, which they did not due to pressure from the White House. It also implies PEMEX building service stations in Texas.
The looming trade war will slow down the American economy. It will make products that Americans buy at the store much more expensive, In an age of flat wages, they will have less money to spend, ergo that will reduce economic activity. Since both economies are tightly linked, and the production chain includes products that travel across borders, Americans will be paying much more for coffee makers, refrigerators, car parts, cars, and yes, berries.
It will make the fantastical promise of a 4 percent annual economic growth even more out of reach. A trade war could very well be the direct trigger of a recession. We are technically close to one already. A trade war, like any student of the Great Depression knows, could trigger a depression.