2017 GDP Growth and CPI Inflation in the U.S., Euroland and Japan

February 20, 2018

Economic growth slowed last quarter from the summer’s pace in the United States, Euroland and Japan but, also in each case was stronger in calendar 2017 than in 2016.

  • U.S. GDP rose 2.6% at an annualized pace between 3Q and 2Q, down from 3.2% in the previous quarter and reflecting a combined 1.8 percentage point drag on growth from net exports and inventories. Real GDP accelerated 0.8 percentage points to 2.3% for 2017 as a whole.
  • Real GDP in the euro area expanded at an annualized pace of 2.5% last quarter, down from 2.9% in the third quarter. Growth intensified to 2.5% in 2017 from 1.8% in 3Q, with about 20-25% of such reflecting positive support from inventories and net foreign demand.
  • Japan experienced a considerably steeper slowdown of growth in the final quarter of 2017. Real GDP rose only 0.5% annualized, down from a 2.9% annualized pace in the third quarter and 1.6% growth in full-2017. The 2017 growth rate was 0.7 percentage points faster the 0.9% rise of real GDP in 2016. Like the euro area but unlike the United States, net exports and inventories made positive contributions last year to economic growth.

A year ago, consumer price inflation was higher in the United States than in the euro zone, whose inflation rate in turn exceeded that of Japan. This ordinal ranking is still preserved, according to the latest available data which are for the month of January, and it is true of both total consumer prices and core CPI that excludes energy and fresh food. In the U.S. and Euroland cases, moreover, inflation was lower in January 2018 than January 2017 despite a recent pickup. U.S. total CPI inflation was 2.1% last month, down from 2.5% a year earlier, and core CPI had fallen to 1.8% on net from 2.3%. In the euro area, total CPI inflation slowed to 1.3% from 1.8%, while core CPI little changed at 1.0% compared to 0.9% a year earlier. In Japan, total inflation was 1.0% last month versus 0.3% in January 2017, but the CPI index that excludes fresh food and energy showed an on-year uptick of just 0.3% in January 2018 versus a zero percent change in the year through January 2017.

The higher U.S. inflation rate partly reflects currency movement. Between end-2016 and end-2017, the trade-weighted dollar fell 9.4%. In contrast, the trade-weighted yen firmed 0.8%, and the trade-weighted euro climbed 5.7%. This year, the dollar has lost over 1.5% additionally on a trade-weighted basis. And lately, it is the yen that has been strengthening the most with a 4.3% trade-weighted rise versus a 0.6% uptick in the euro. Dollar depreciation will lift U.S. competitiveness at the expense of Japan and Europe but also will amplify the wedge between the perceived policy needs of the Federal Reserve on the one hand and the BOJ and ECB on the other.

The Fed is ahead of the European Central Bank on the path of policy normalization. The Fed has hiked interest rates five times and is starting to trim its balance sheet. ECB rates haven’t started to rise, and quantitative easing, though reduced in size, will continue through September at least. The re-nomination of BOJ Governor Kuroda for a second five-year term keeps the timing any changes in that central bank’s quantitative stimulus very uncertain.

One should not, however, automatically infer that these different monetary policy trajectories will lend the dollar discernible support. That’s not how 2017 played out, and there are plenty of other historical examples where a relative tightening of Fed policy failed to co-exist with a strengthening dollar. Since the end of 2016, moreover, the 10-year German bund yield has actually risen a bit more than the 10-year U.S. Treasury yield.

The dollar’s main headwind has little to do with economic data trends in the U.S. or abroad. It has everything to do with the U.S. currency’s hegemony among reserve asset currencies and the enormous offshore dollar holdings that have built up since the dollar replaced sterling in this role. Being welcomed as a reserve currency would not have been possible without America’s leadership in the world economy, but it rests on leadership in a number of other realms as well, including a stable, well-functioning political system and trusted foreign policies. The Trump Administration has habitually turned old norms on their head, forcing friend and foe to recalculate the truths and values represented by the American brand. That’s apt to be both a long-term and short-term problem for the dollar.

Copyright 2018, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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