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10 Apr 2015
Stronger USD might strip off 0.5% from US GDP growth this year – BAML
FXStreet (Barcelona) - Ethan Harris, Global Economist at BofA-Merrill Lynch, believes that according to their forecast of a EUR/USD parity by year-end, the strength of the Dollar will reduce US GDP growth this year by 0.5%.
Key Quotes
“At the outset, let’s keep the dollar move in perspective. In terms of economic behavior, what matters is not the volatile daily index, but the monthly real trade-weighted index for all trading partners. That index is up 10.5% in the 12 months through March.”
“Assuming the dollar renews its rebound, in line with our FX team’s forecast (e.g. Euro at parity by year-end), we estimate that the strong dollar will slice about 0.5% off of GDP growth this year.”
“This week, NY Fed President Dudley cited a similar 0.6% estimate of the impact of the US dollar on GDP growth. Why not more? Remember, according to the OECD data, the US is the least open economy among 40 major countries (measured by the ratio of imports and exports to GDP). The dollar is a modest part of overall financial conditions.”
“We would be very surprised if dollar headwinds overwhelmed the other tailwinds. The end to Federal fiscal austerity alone eliminates a 1.5% or so drag on GDP growth. The 50 bp or so drop in private sector bond yields is worth a few tenths on growth.”
“The wealth effect from rising asset prices is probably less powerful then in the past, but it still matters. Household assets jumped 26% ($19.8 tn) over the last three years; presumably some of that is trickling into consumer spending. The improvement in confidence is also consistent with stronger growth.”
Key Quotes
“At the outset, let’s keep the dollar move in perspective. In terms of economic behavior, what matters is not the volatile daily index, but the monthly real trade-weighted index for all trading partners. That index is up 10.5% in the 12 months through March.”
“Assuming the dollar renews its rebound, in line with our FX team’s forecast (e.g. Euro at parity by year-end), we estimate that the strong dollar will slice about 0.5% off of GDP growth this year.”
“This week, NY Fed President Dudley cited a similar 0.6% estimate of the impact of the US dollar on GDP growth. Why not more? Remember, according to the OECD data, the US is the least open economy among 40 major countries (measured by the ratio of imports and exports to GDP). The dollar is a modest part of overall financial conditions.”
“We would be very surprised if dollar headwinds overwhelmed the other tailwinds. The end to Federal fiscal austerity alone eliminates a 1.5% or so drag on GDP growth. The 50 bp or so drop in private sector bond yields is worth a few tenths on growth.”
“The wealth effect from rising asset prices is probably less powerful then in the past, but it still matters. Household assets jumped 26% ($19.8 tn) over the last three years; presumably some of that is trickling into consumer spending. The improvement in confidence is also consistent with stronger growth.”