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How does the US economy impact the UK?

As some of his main campaign promises start to gather dust in the White House reject cupboard, Trump’s under mounting pressure to deliver something from his policy arsenal. After his repeal of Obamacare was rejected, it was thought his tax reforms would be much more straightforward.

But this week the House of Representatives speaker, Paul Ryan, revealed that it would take longer to make these tax changes than it would to replace Obamacare.

As a result of this, the markets are facing up to the fact that a boost to US earnings isn’t around the corner. And this came straight after news that the US central bank wants to cut its $4.5 trillion balance sheet.

Headed up by Janet Yellen, the US Federal Reserve (Fed) wants to start selling off its bonds and mortgage-backed securities, which it bought a lot of after the financial crisis to keep interest rates low and encourage economic growth.

Consumer confidence vs economic data

A look at the US economy today shows low unemployment, high consumer confidence, on-target inflation, and stable GDP growth estimates. The Fed’s even started to build up interest rates again.

It’s a little more interesting when you dig into the numbers (if like me you like to take advantage of child and husband-free time to do this).

An interesting split has emerged in the data; US businesses and consumers believe their economy is sprinting ahead, but the hard numbers reflect little change and the Fed’s maintained its growth expectations. The question is; which do you trust?

A view could be taken that this hard data is underestimating business and consumer sentiment, which in turn is holding back GDP estimates3. Whilst the energetic growth seen in the first quarter – caused by the so-called reflation trade – is unlikely to be sustained, some reckon 2017’s global growth expectations could be substantially upgraded.

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On the other hand, more data is clouding America’s rosy picture. There’s been a pretty big slump in bank lending growth since the beginning of the year, and slower loan growth usually translates to slower GDP growth. Could big US companies be waiting for these tax changes before taking out their loans?

Bloomberg’s US growth expectations haven’t changed much, with 2.2% pencilled in for 2017 – despite a drift in first-quarter forecasts from 2% to 1.8%.

How a US slowdown could impact the UK

America’s economy is one of the largest in the world. Its stronghold on the global economy has weakened over the last few decades, but its influence is still powerful.  It’s set to remain that way too, with India, China and the US on course to be the three largest economies in the world by 20501. After all, when America sneezes, the world catches a cold.

For example, the UK is the second biggest exporter of services in the world, and the US is our largest customer2. A slowdown in the US economy could force it’s domestic businesses to tighten their purse strings when it comes to buying services. If this international trade starts to dry up, we could feel the effects at home.

The UK economy is already battling against its own uncertainty, especially now the official countdown to Brexit has begun. If America loses its footing even for a second, the UK could suffer. The next two years are going to be very interesting indeed.

1 PricewaterhouseCoopers; The world in 2050

2The Guardian, How America’s new president will affect the global economy

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