- US economy is still sizzling, outperforming other regions.
- Several factors behind this strength, such as heavy public spending.
- For US dollar to enjoy a massive rally, it may also need risk aversion.
Why is the US economy still so strong?
One of the most striking developments over the past year has been the extraordinary resilience of the US economy, despite the highest interest rates in a generation. The United States grew 2.5% last year, much faster than any other advanced economy, and by all indications continues to outperform in early 2024.
Several elements lie behind this strength. First and foremost, the US government is running an astronomical budget deficit, which amounted to more than 6% of GDP last year. This enormous public spending has shielded economic growth, but has also raised concerns about debt sustainability.
In contrast, most European nations are running much smaller deficits, which helps explain why growth in the euro area has been so anemic lately.
Immigration flows have powered the US economic machine too. With an influx of migrant workers coming in, the labor market continues to boom, cushioning consumer spending. And with wage growth finally surpassing inflation, the cost of living crisis has started to ease.
How the loan market is structured played a huge role as well. In the US, most mortgages are given at a fixed rate for 30 years. As such, many people locked in extremely low borrowing costs during the pandemic, insulating them from the sharp increase in interest rates that ensued.
Most other countries operate with adjustable rate mortgages, where payments reset every few years depending on interest rates. Therefore, many homeowners in Europe have started to pay higher monthly costs on their loans, squeezing spending even further.
Beyond all of this, America’s energy independence also helped safeguard consumers from the worst effects of soaring oil and gas prices following the invasion of Ukraine.