Let’s break down some facts from this year…

Despite better production for many countries during the first part of the year, consensus is that global growth is still seen to drop this year due to softer dynamics among developed economies. For the past year, growth has only been expanding by 1.5% in the developed eurozone which has been the slowest since 2013. In China, it has been growing at 6.4% which also has been the slowest in years.

In the U.S., growth accelerated rapidly in the first quarter, although the reading was most likely skewed from government shutdown rebound effects as well as by past front-loading of imports and a build-up of inventories due to the trade war. What was worrisome, private consumption and fixed investment both weakened in the first quarter.

Looking at second quarter, the trade war will likely skew the reading again, as importers will continue to add to inventories to avoid possible new tariffs. Thus, inventories and imports of newly-targeted products could surge again. On the flipside, labor markets remain strong, and consumer confidence picked up, which could mean a pick-up in consumer consumption.

We can still see the U.S. slow this year, with higher interest rates and fading fiscal stimulus. But in contrast to global growth the U.S. continues to accelerate. Not to be a broken record, but an all-out escalation of the trade war with China is by far the largest downside risk, with trade uncertainty likely to persist even if a deal is reached going forward.

For the bright side…

The growth in the U.S. has accelerated thanks to changes in policy; a combination of lower marginal tax rates – particularly on corporate profits – as well as deregulation which hopefully will help the longer-term outlook. 

According to Brian S. Wesbury – Chief Economist of First Trust, “Policy-led acceleration in U.S. growth is also why some major foreign economies are doing worse.  Lower tax rates and deregulation have made the U.S. a better place to conduct business activity and have made other countries with similar standards of living (Europe and Japan) relatively worse.  We think the data will ultimately show that businesses have shifted resources in response to the new direction of U.S. policy, which means less activity than would otherwise be the case for our trading partners.”                  

China, too, has been affected by the trade conflict.  For the past 20 years, U.S. presidents of both major parties have looked the other way while China pirated our intellectual property.  That policy – or “non-policy,” represented a huge subsidy for China. Now that indirect subsidy looks like it’s coming to an end. 

None of this means we are rejoicing that foreign economies are growing more slowly.  We’re not.  We’re merely pointing out that foreign growth and U.S. growth are de-coupling.  The U.S. is now picking up growth because of more competitive policies.  These new policies are reducing the previous incentives which damaged U.S. competitiveness, and often pushed growth overseas.