US: Dollar drag on GDP growth – Deutsche Bank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Dec 31, 2015.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

    Oct 7, 2015
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    FXStreet (Delhi) - Research Team at Deutsche Bank, suggests that on the back of weak manufacturing and international trade data, second half 2015 US real GDP growth is poised to rise by less than 2% as current quarter output is projected to increase just 1.5%.

    Key Quotes

    “This would result in 2015 growth of 2.0% (Q4/Q4), slightly below the 2.2% average annualized gain in economic output since the economy exited recession more than six years ago. More importantly, we expect 2016 real GDP growth to come in at only 2.2% (Q4/Q4), down 50 basis points from our previous estimate. This is due to a reassessment of the negative effects of the rising dollar and the possibility of further appreciation yet to come.

    Nevertheless, with real potential GDP growth only around 1% due to slowing productivity growth, even a trend-like 2% GDP growth rate would likely be enough to put further downward pressure on the unemployment rate.

    The US factory sector is bearing the brunt of depressed global demand. The manufacturing ISM survey is in contraction territory, and the industrial production index is down from its cyclical peak in December 2014. Given that changes in the trade-weighted dollar tend to affect net exports with a substantial lag, the economy has yet to experience the full impact of the appreciating dollar. If the trade-weighted dollar remains at its current level or appreciates further, net exports could pose a more significant drag on US economic activity.

    Based on the appreciation to date, we estimate the rise in the dollar is worth roughly 60 basis points of monetary tightening. The fact that the currency is doing some of the Fed’s work for it is one reason why we expect the trajectory of interest rates to be mildly shallower than that implied by the FOMC’s central-tendency forecasts.

    The strong dollar will also weigh on import prices, and hence consumer goods inflation. To be sure, there is a risk that the US dollar will rise substantially further because the Fed is the only major central bank that is beginning to remove monetary accommodation. Other central banks, notably the ECB, are further easing monetary policy.

    Furthermore, the US factory sector is being hamstrung by a mini-inventory cycle that is also depressing output. This destocking will likely end next quarter. In the interim, the consumer looks set to continue to do the heavy lifting with respect to growth, but we expect spending to modestly slow over the course of next year because of the waning impact of the energy tax cut, a substantial portion of which appears to have been saved.”
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