Janet Yellen, chair of the US Federal Reserve, is dismissive of her nation’s first quarter slowdown and suggests that the recovery in America remains on track despite a weak start to the year. First quarter GDP in America fell to 0.2% on an annualised basis but Ms Yellen claims the slowdown was ‘largely the result of a variety of transitory factors that occurred at the same time’.
So why is this so important to us in Europe? A strong US economy is a vital for the global recovery and any indication that it is weakening will dent confidence. And confidence, as we know, is all.
No single economy is more important that the US. It accounts for almost one-fifth of global demand and is the second-largest trading nation after China. More important than that, it leads the way for the rest of the world in terms of influence and business sentiment. Any persistent weakness would have a knock-on effect elsewhere, so we are right to watch its performance closely.
What can we expect? With America ‘well positioned for growth’ don’t be too surprised to learn that the Federal Reserve will most likely increase interest rates before the end of 2015, possibly as soon as September. Such a move by the US will trigger speculation that the Bank of England will follow suit. Minouche Shafik, the Bank’s deputy governor, has indicated that a rate rise here would be likely to follow close on the heels of the Fed as she expected a recovery in productivity growth ‘over the next year or so’.
On both sides of the Atlantic, our paths and fortunes are inextricably linked. This interdependency has its pros and cons, but as the UK’s economy is still finding its post-recession feet, a strong America to lean on offers much needed stability.
