Glen Hodgson is senior fellow at the Conference Board of Canada.
Donald Trump's election campaign created great economic expectations for his supporters. Among the many things he promised was that U.S. economic growth would take off to 3 per cent annually and beyond.
But many non-partisan analysts think sustainable U.S. growth potential has faded to around 2 per cent annually, similar to that of Canada. A boom in private investment and productivity growth would be needed to attain the rates of growth that Mr. Trump promised, and it's hard to see how that's going to happen.
Current U.S. economic performance is a mix of both very good and mediocre. The overall outlook for 2017 is solid, if not spectacular. After nearly a decade of acute labour-market pain, the U.S. economy is approaching full employment, which is great news. Unemployment in the United States has fallen to 4.3 per cent and nominal wages are rising at a healthier pace. As a result, consumption growth is projected at a solid 2.5 per cent or higher this year and next. Private investment has firmed, and could grow 3.5 per cent or a bit more this year – acceptable, but not the investment miracle that some had expected.
The tumultuous policy environment inside the White House and on Capitol Hill is hurting other key components of growth. The public sector is not providing any meaningful contribution to economic growth in 2017, and little improvement is expected in 2018. Mr. Trump's promised massive boost to public-infrastructure spending may not materialize. Indeed, the Trump administration has quietly modified the plan. Any significant increase in infrastructure investment is likely to come from private sector, state and municipal funding of new infrastructure spending, not from the federal budget.
Moreover, Mr. Trump's increasing political problems are hurting his ability to advance his economic-policy agenda. The proposed Trump budget appears to be largely political posturing and is running into difficulties with the Republican Congress. His tax-reform plans are being constrained by numerous factors: divided political will, backlash from vested interests in the existing system, the inability to identify specific sources of funding for deep tax cuts, his own administration's contradictory messages, and shortages of internal management capacity at the Treasury.
Financial markets reacted to the prospect of tax reform and lighter regulation under Mr. Trump by hitting new highs in the first 100 days of his administration. But tax reform will have a long and twisty political road if it's ever going to happen. Financial markets now appear to understand that there is no coming growth miracle, and have started to hedge their bets.
Underlying economic-growth potential is guided everywhere by three basic factors: labour markets, private- and public-sector investment and productivity growth. Labour-force growth is arguably the most important factor, but it is now slowing in the United States. Higher levels of immigration could help fill the gap, but the Trump administration's anti-immigrant rhetoric is altering America's historic brand as a magnet for people. The result is likely to be reduced levels of immigration, which will impair labour force growth. U.S. productivity growth has also sharply weakened.
Aggressive trade expansion could help underpin growth, but uncertainty rules over trade policy due to the Trump administration's stated policy stance and sometimes conflicting policy statements delivered by Twitter. U.S. trade negotiations with the European Union seem to be making little progress, failure to conclude the Trans-Pacific Partnership has hurt U.S. export potential, and the North American free-trade agreement is up for renegotiation. Many trade interest groups and border states are pushing back on Trump administration proposals that could impair two-way trade growth, such as the proposed border tax on imports.
The U.S. market absorbs 70 per cent of Canadian exports of goods and services, so U.S. growth is a pivotal factor for Canadian economic success. If there is no growth miracle under Mr. Trump, that would reinforce the importance of continuing to reduce Canada's dependence on the U.S. market by diversifying trade and investment toward Europe and Asia. The successful completion of the Comprehensive Economic and Trade Agreement with the EU has given Canadian businesses a golden opportunity to expand into the EU market of 500 million relatively wealthy consumers.
Moreover, economic growth is expected to stay strong in China and throughout much of Asia. Canada's trade and investment pivot toward Asia could help to create new opportunities in a dynamic but highly competitive region. Renewed free-trade discussions with Japan, either bilaterally or as part of a TPP without the United States, and the potential for freer trade with China could strengthen Canada's two-way trade and investment links with Asia.
The Age of Trump means policy unpredictability and uncertainty flowing from the U.S. policy makers, and businesses in Canada should be prepared for more bumps to confidence to come. Over all, the U.S. economy should perform well this year and next, but is unlikely there will be a sustained Trump growth miracle.