US: A Low Growth Is Self-Inflicted

Why is the economic growth so low?

Last year, economic growth in the US was just 1.6%, the lowest since 2011. In the face of such growth, Americans are witness to the election of Donald Trump as the President, who promised an annual economic growth rate of 4%. The truth is that such high economic growth in America has not happened since the 1990s. It looks even more unbelievable when one considers Trump’s contradictory plan to achieve it. How he will achieve such high growth, nobody can figure. However, many trust his business acumen; he knew how to make billions for himself, therefore, he would know how to recover America. May be electing him for such outlandish reasons was not a better choice. But for now, America has to struggle with many concerns, including its declining economy.

But before we delve into these issues, it may help to know why the US has had such slow growth? Is it just because of the financial crisis or is it something more than that? Could it be that there is a market saturation and dwindling motivation? The crisis definitely had an impact, but currently, the biggest problem in the US is the significant drop in productivity. It drags along with itself, a reduction in wages, in employment and has resulted in reduced economic growth; the growth is rising, but at a slower rate. There are different propositions on how the economy has come to this state, and there have been several proposed solutions. Many rely on Trump, but, let us face it; he does not have a magic wand.

The IMF considered the announced scenario with Trump’s promises, and still came out with a forecasted growth of around 2.3 percent in 2017 and 2.5 percent in 2018. It predicts that the growth can be lower than that, perhaps, given the administration inclination towards protectionism and the resulting uncertainty.

Trump’s intention to increase spending in order to stimulate the economy will probably create future inflationary pressure, which will put the US central bank in fait accompli, when it must raise interest rates faster and higher than expected. The increase of import tariffs and leaving the transatlantic trade integration can have a boomerang effect. There are shortcuts to success, and those do not last. Increasing domestic consumption is better done through increasing productivity, improving competitiveness of American products, and conquering the online retail business logistics, that have stalled retail operations across the country.

Also, a strong dollar could actually be counterproductive not only for the US, but also for the rest of the world. A stronger dollar would mean lower exports for the US, and lower global economic growth because of declining volumes of trade. Contrarily, a lower dollar would increase prices domestically and in exports.

Presumably, the dollar will continue to grow. Wages are not growing fast enough to increase economic growth. If they would rise higher, there would be an increase in prices, production and consumption, which would, consequently, accelerate overall economic growth. But the point here is that the value of the dollar is not just domestically determined. As the widest traded currency, its value is driven internationally. Remember the accusation on China and the EU about they deliberately affecting the value of the dollar to stimulate their growth? This has been one of the several reasons that the current administration points out against the decelerating economy. And the result has been stronger protectionist policies and rearrangements. International trade has protected the dollar, and is perhaps the best step forward.

 

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