This Week In The Economy: Under The Hood of The U.S. GDP Report

Welcome to a regular snapshot-review of U.S. and international economic news that aims to 1) provide a window into the challenges and decisions facing businesses today, 2) determine the direction of economic policy — such as the speed at which central banks decide to raise interest rates, and 3) assess what the impact will be for consumers.

Strong U.S. Growth Masks Softer Domestic Investment, Spending

The U.S. economy grew faster than expected in the first quarter of this year, but a look under the hood shows there remain areas of sluggish activity in the world’s largest economy.

Real GDP rose by 3.2% in Q1, compared to +2.2% in Q4. The acceleration in real GDP growth, however, was mostly the result of an upturn in state and local government spending, ramped up private inventory investment, higher exports, and a smaller decline in residential investment. Meanwhile, there were decelerations in spending by U.S. consumers and nonresidential fixed investment, both of which are key to long-term sustainable economic growth. Imports, which are a subtraction in the calculation of GDP, turned down — an occurence that is likely to be temporary.

Final sales to private domestic purchases — a measure of the underlying strength of the domestic economy — rose just 1.3%, which is the slowest rate of growth for this component in almost six years.

U.S. Ramps Up Sanctions On Iran Oil Exports, Wants Zero Sales

The United States this week announced the administration will no longer exempt any countries from U.S. sanctions if they continue to buy Iranian oil, part of its campaign to exert “maximum pressure” on Tehran by eliminating all of its revenue from oil production.

The move will primarily impact five prominent buyers of Iranian crude — China, India, Japan, South Korea, and Turkey. The White House said the U.S. government is working with major Arab Gulf producers, Saudi Arabia and the United Arab Emirates, “to ensure global oil markets remain well supplied.”

China is not happy with the decision, as Iran is a key energy supplier to the world’s second largest economy, and has accused the U.S. of acting unilaterally without a regard for the needs of other nations.

Oil prices also rose in response to the announcement, with the expectation that less supply will lead to tighter oil market conditions. OPEC’s daily basket price went from $72.44 per barrel at the beginning of the week to $74 as of Thursday.

China-U.S. Trade Talks To Resume, Still Searching For A Breakthrough

Senior U.S. officials head to Beijing next week to resume talks with their counterparts in the Chinese government, as both sides continue to hope for an agreement that will bring an end to trade hostilities.

United States Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will lead the U.S. delegation, with the talks set to begin on April 30. The White House said the discussions will again revolve around key issues including intellectual property, forced technology transfer, non-tariff barriers, agriculture, services, purchases, and enforcement.

News reports indicate an agreement could be reached as soon as this summer, with the leaders of both countries potentially meeting in Washington to sign the accord. This comes as a paper published by the European Central Bank this week warned of the serious consequences should trade tensions take a turn for the worse:

“Large negative effects could materialise if trade tensions were to escalate further. Uncertainty related to protectionism is weighing on economic sentiment and it may raise further, potentially eroding confidence and affecting the euro area and the global economy more significantly.” — ECB

Sluggish Global Economy Hurting Major Exporting Nations

The slowdown in the global economy drags on, with the mixture of weakdemand and protectionist trade policies combining to dampen activity. The impact is being felt the most by countries that rely heavily on exports to power their economy — such as Germany and South Korea.

The iFo Institute reported this week that “the business confidence of German exporters is becoming gloomier,” with the difficult global economic environment not providing any impetus to German exports. And a separate report described the mood among Germany’s manufacturers as “markedly” worse.

Meanwhile South Korea reported this week that economic activity shrank by 0.3% in the first quarter of this year. Consumer spending increased by a mere 0.1%, while non-residential investment by businesses plunged 10.8%. Most importantly, exports contracted by 2.6%, led by decreases in sales of electrical and electronic equipment. As a result, manufacturing decreased by 2.4%, again centering around electrical and electronic equipment, as well as chemical products.

Japan’s Central Bank Lays Out Timeline For Low-Interest Rate Policy

The Bank of Japan’s senior policymakers met this week, and in their statement after the meeting indicated a potential end-point to their aggressive push to jumpstart an economy that has been sleepwalking for years.

The BOJ said it “intends to maintain the current extremely low levels of short- and long-term interest rates for an extended period of time, at least through around spring 2020, taking into account uncertainties regarding economic activity and prices including developments in overseas economies and the effects of the scheduled consumption tax hike.”

Previously the central bank had only said it would continue with its highly accommodative monetary policy measures for “as long as it is necessary.” In a nod to events outside its control, the BOJ said Japan’s economy is likely to continue on a moderate expanding trend, “despite being affected by the slowdown in overseas economies for the time being.”

Bank of Canada Also Eyeing Slowing Global Economy As It Keeps Rates Unchanged

Canada’s central bank also left its short-term interest rates unchanged after senior officials met this week, with the weak global economy a prominent factor.

The Bank of Canada noted that global economic growth “has slowed” by more than its staff initially projected at the beginning of the year, with ongoing uncertainty related to trade conflicts undermining business sentiment and activity, “contributing to a synchronous slowdown across many countries.”

On the domestic front, the central bank said growth during the first half of 2019 is now expected to be slower than previously expected. It said the drop in oil prices in the second half of 2018, combined with ongoing transportation constraints, have curbed investment and exports in the energy sector.

Meanwhile, “investment and exports outside the energy sector … have been negatively affected by trade policy uncertainty and the global slowdown,” it added.