(30 JULY 2018)DAILY MARKET BRIEF 2:Colossal US Q2 GDP growth – is it sustainable ?

(30 JULY 2018)DAILY MARKET BRIEF 2:Colossal US Q2 GDP growth – is it sustainable ?

30 July 2018, 14:39
Jiming Huang

US second quarter GDP growth estimates at 4.10% (expected: 4.20%) annualized q/q from 2% previously, its fastest pace in four years. The strong US growth numbers in Q2 are mainly explained by Trump’s USD 1.5 trillion tax cut, including lower tax rates for corporations of 21% (down from 35%) and for American households (along with tax benefits). The legislation is expected to expire by the end of 2025. Accordingly, the measure strongly boosted private consumption and investment across the country due to higher spending. Another significant factor is the impact of Chinese imports from the US in agricultural and meet products.

However, contrarily to Trump’s view, a sustained GDP growth of 4% by the end of the year appears improbable. Production capacity is above long-term average, labor market is tight and interest rate hikes are approaching, without talking about dragging uncertainties around trade war. We would rather support Fed’s expectations of Q4 GDP y/y growth at 2.80 and inflation (ex. Energy and Food) along 2%.

In addition to less than a year old fiscal stimulus policy, the Trump administration is already discussing a new tax plan for October 2018, which would reduce corporate tax by 20% while the rest of the policy would focus on the middle class.

Today we have June Home Sales and July Dallas Fed Manufacturing Business Activity Index.

By Vincent Mivelaz