Bill Dudley, the president of the U.S. Federal Reserve Bank of New York, said Monday that the U.S. economy probably grew by a weaker-than-expected 1 percent in the first quarter of 2015. He also said he expected growth to return once "temporary factors" had subsided. This could dash the hopes of U.S. savers, since this sluggishness pushes the likelihood of an interest rate hike further into the future. Meanwhile, policymakers around the world are hoping that his confidence proves well founded.
Prospects for a Rate Rise
The world's market-watchers have long engaged in hot debate over when the United States would raise its interest rates from 0.25 percent, where they have wallowed since the dark days of 2008-2009. A seemingly resurgent U.S. economy had been bringing the possibility closer and closer. At times, interest rate prediction can be somewhat akin to soothsaying, as every utterance made by Federal Reserve Chairwoman Janet Yellen is studied for hidden meaning. The omission of the word "patient" from March's official statement, for example, led many to conclude that the long-awaited rate rise would arrive in June. Last Friday's jobs report was the next major item due for inspection, with a strong result relative to expectations likely to confirm the June time frame in the markets' collective consciousness. But Friday's employment figures disappointed, with about half the expected number of jobs created in the month — the worst performance since December 2013. Indications now point toward disappointing first-quarter growth figures, which will be released later this month. With the United States standing as the main beacon of light in the global economy, the repercussions of any weakness will be felt around the world.
The most striking aspect of the weak employment figures was the shift in narrative that followed their release. The U.S. economy had been on an upward track for some time, working through the process of kicking its quantitative easing habit and posting steadily improving jobs numbers. This progress had been reflected in a strengthening dollar. In a global market where various sluggish economies are trying to ride exports back to growth, having the world's largest economy boast a strong and strengthening currency while not relying heavily on exports (which are negatively impacted by the strength of the dollar) has seemed to be an ideal situation for all concerned. The dollar could serve as a tent pole against which all the other currencies devalue themselves, while its strength could allow the U.S. consumers to buy more products from abroad.
But the recent negative news will likely push back the interest rate hike until later this year, at the earliest. The delay will immediately weaken the dollar as investment spreadsheets around the world are adjusted to reflect the new expectations. If the downturn turns out to be more substantial, with the jobs report auguring a more significant slowdown in the U.S. economy, the rest of the world, currently in a race to out-compete and out-export one another, might find that it has no obvious customer to buy its goods. In fact, the jury was already out as to whether even a buoyant United States could single-handedly consume the amount of surge in exports that the rest of the world seems to be trying to produce.
The United States' number one source of imports is China; Americans consume roughly 19 percent of Chinese exports. The heavily export-dependent Middle Kingdom is already struggling to hit its GDP growth target for 2015 (recently lowered to 7 percent), and a worsening economy in its primary market could only exacerbate its problems. In Japan, which is responsible for 7.8 percent of U.S. imports, the government has tied itself politically to an economic program centered on weakening the yen in order to stoke inflation and increase exports. On top of the obvious potential for decreased import demand, if the United States ceases to provide a strong currency around which the rest of the world can devalue, Japan could find itself in an all-out currency war that could generate a true "race to the bottom," as all players try to devalue against each other. This would force Tokyo to scupper its grand plans of escape from 25 years of economic malaise.
Europe has also been enjoying the benefits of a weak currency. Germany, responsible for 6 percent of U.S. imports and dependent on the United States as its second-biggest export destination, has been trying to force its neighbors to adopt the German export-led economic model, for which it has suffered upsetting comparisons with its Nazi forebears. In the absence of a thriving external market to receive European exports, this could be another grand plan destined for the chopping block, with Europe's future becoming ever more uncertain as a result.
More broadly, the United States is currently in talks on two marquee trade agreements, the Trans Pacific Partnership in Asia and the Transatlantic Trade and Investment Partnership with Europe. Both pacts are projected to create great economic gains for all involved. For the policymakers of Asia and Europe, however, every negative step taken by the U.S. economy decreases the treaties' immediate potential, possibly weakening political support for the pacts. Indeed, the pact with Europe was struggling to make political headway even when the U.S. news was positive.
Certain international figures would enjoy a moment of schadenfreude over a weakened dollar. Countries with high current account deficits and dollar-denominated debts have seen their problems increase with the dollar's rise, so their leaders would no doubt enjoy the momentary respite of a U.S. slowdown. Turkish President Recep Tayyip Erdogan is the primary member of this group, especially since he will be facing general elections in June. Sighs of relief may be heard in Chile, Brazil, South Africa and Malaysia as well.
To give the U.S. economy some benefit of the doubt, seasonal factors likely contributed to the low jobs growth. Moreover, even if the first-quarter GDP figures do turn out to be poor as Bill Dudley suggested Monday, optimists can still point to the precedent of the first quarter a year ago, when the U.S. economy shrank by 2.1 percent before recovering strongly for the rest of the year. (Seasonal factors were also to blame in that case.) However, there are signs that this could be the start of a more substantial downturn, with the strong dollar possibly having corrosive effects beyond the U.S. exports sector. Furthermore, with the slowdown in shale gas production caused by the low oil prices putting the so-called shale miracle on hold for now, the United States might very well be re-entering a more modest period in its recovery. Most of the rest of the world will be hoping that any slowdown is as temporary as possible, since many do not have a backup plan to relying on strong U.S. growth.