Why U.S. economic growth might be weaker than you think
Dear reader,?
I did not publish an article for quite a while as there were many personal circumstances that required my attention. Given that there are always many different topics and events that are taking place and are being reported on, I would like to focus this time on the larger picture.
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U.S. economic growth in 2023
According to the latest statistics from the U.S. Bureau of Economic Analysis, the U.S. economy grew by 2.1% in the third quarter of 2023 and projects growth to reach 2.2% in the fourth quarter respectively.
While these numbers seem quite positive, given that most economies in Europe are stagnating (e.g. the United Kingdom) or even contracting (e.g. Germany), I would like to explain in the following, why these numbers should be alarming.
The cost of economic growth
In macroeconomic theory, a government is supposed to help lift its economy out of a recession by an increase in spending and do the opposite in boom times. This is done to keep the economy from overheating as economic growth in most cases comes simultaneously with increases in general price levels.
At first glance, 2.1% growth in the United States for the third quarter seems like a in comparison positive level, we need to ask ourselves how this growth was achieved in the first place. As described above, government spending should increase in times of recession to stimulate the economy and help to kickstart economic activity. While the United States is not officially in a recession, how come it reached a deficit of over 8% as a share of GDP as of the third quarter of 2023?
Just to make this correlation more tangible, for every four dollars spent as part of the deficit, an increase of one dollar in economic activity was created. This in itself should be a huge concern for anyone watching the situation closely.
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What is going on?
A lot of the spending can be explained by social expenses, mostly health care and social security, which make up about 46% of all U.S. government spending. This number is at an all-time high, which is not only applicable to the United States but also most of the other developed economies like Canada, France, Germany and the United Kingdom for example. Generally, dependency towards government-funded financial support increased exponentially in the last three years.
The ability to run a deficit of 8% of GDP can be attributed to the United States having the undisputed world's reserve currency. If any other country would experiment at such high deficit levels, the results would be devastating financial losses, market turmoil, and sharp slowdowns in trade and economic growth, especially in the medium to long term. The United Kingdom is closely approaching a 5% deficit as a share of GDP, which cannot be sustained for long. Therefore anticipate a reduction in UK government spending.
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