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The US post-election economic outlook

By David Thomson, Managing Director, Close Invoice Finance

Now that George Bush has won a second term as US President, attention will inevitably turn toward the economic issues that America faces over the next four years and the challenges facing the new US Administration.

The budget deficit is running at a record $445bn for the fiscal year 2004 equal to 3.8% of GDP and the current account deficit is over 5% of GDP. The twin deficits are now a major cause for concern and to keep funding them is linked to the purchase of US Treasury bonds by banks in the Far East. Yet the fundamentals of the American economy remain strong. Its Gross Domestic Product remains awesome at over twenty per cent of the world's output. Put another way, American GDP is more than the combined GDP of the UK, Germany and Japan.

The Bush administration has cut taxes but it remains to be seen whether this policy can be continued, since all the signs point to a marked reduction in the growth of the American economy next year, meaning that the amount of money raised through taxation will also reduce. But as the tax intake declines, the new administration is likely to face higher bills for funding both the military intervention in Iraq and the task of helping to create a new democratic social order there.
Another imponderable concerns international trade policy. Nearly three years ago Bush imposed 30% tariffs on foreign steel but subsequently dropped his stance when a full-scale trade war appeared to loom. It remains to be seen whether the new administration will want to revive these issues.

What is an unusual development is that the current climate shows American public opinion preoccupied with issues surrounding foreign policy and security. These issues were more prominent during the Presidential election campaign than domestic issues, which are usually what decide election results.
The dominance of foreign affairs on the American economic and political agenda is likely to continue for the foreseeable future. As well as Iraq, the Middle East is likely to continue to be the major focus of attention. Crude oil prices could well go well over $50 per barrel and therefore have a major impact not just on economic performance in the United States, but also throughout the world.

Furthermore, the Israel-Palestine conflict will continue to loom large as a source of global instability and a continuing pretext for much terrorist activity. The new presidential term would indeed earn its place in history and do the world a great service if it succeeded in resolving the Palestinian question once and for all.

American spending on defence far exceeds anything that any other nation commits. Even though the amount is about half of what it spent at the height of the confrontation with the Soviet Union during the Cold War, the figure of nearly four per cent of gross domestic product remains massive. The US defence budget is twice that of the combined defence budget of all the members of the European Union. If new problems arise in global hot spots, America may well have the appetite to launch without international consultation, a new military adventure along the lines of Afghanistan or Iraq. How much needs to be spent on defence and the impact this might have on the domestic budget calculations will depend crucially on the extent to which the "war on terrorism" succeeds and whether Bin Laden's al-Quaeda movement can be crushed.

What is hardly in doubt unless some unforeseen environmental or terrorist catastrophe brings the American Colossus to its knees is that America's domination of the global economy will continue. Furthermore, it is likely to continue to act unilaterally (in defiance of bodies like the United Nations) on the war on terror simply because the contributions that other allies such as Britain bring are basically negligible, although Bush will continue to appreciate the moral support we provide. Whether his new found confidence as a result of the election victory makes him even more aggressive towards those with whom he wishes to eradicate remains to be seen ­ watch out North Korea.

While America continues to enjoy its material wealth at home, its emission of polluting and climate-changing greenhouse gases affects all its international neighbours. Furthermore, a more warlike America unhindered by the threat of Soviet retaliation and unconcerned by the doubts of international bodies like the United Nations, means that the outlook for the rest of us for the next four years and beyond is far from being a reassuring one. But at least they consider us to be 'best of pals'.



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