By Michael G. Plummer
Against a backdrop of high inflation, rising interest rates, fiscal dysfunction and geopolitical conflict, many gloomy scientists predicted that the US economy would end 2023 in stagnation or even recession. Still, the U.S. economy has proven remarkably resilient.
In November and December 2023, the US consumer price index increased by 0.1 percent and 0.3 percent, respectively. Relatively good news on inflation led the Federal Reserve to leave interest rates unchanged at its last meeting and hinted at possible rate cuts in 2024. In 2023, the unemployment rate remained at historic lows and the labor force participation rate increased throughout the year. U.S. GDP performance exceeded expectations with robust annual growth rates of 4.9 percent and 3.3 percent in the third and fourth quarters of 2023. The S&P500 stock index rose 24 percent for the year and the U.S. dollar remained strong.
Not surprisingly, most forecasters are revising their 2024 estimates. While they still expect slow growth in 2024 – the International Monetary Fund expects growth of just 1.5 percent – it's hard to find anyone who is still predicting a recession. The country's policymakers may have achieved one of the rarest of macroeconomic feats: the “soft landing.”
Much of this is good news for Asia-Pacific economies. The United States is one of the largest foreign investors in the region. It accounts for about 15 percent of East Asia and the Pacific's trade. The United States is by far the largest export market for emerging and developing countries in Asia. The relatively robust growth suggests stronger demand for the region's exports, which is particularly important given the challenging external environment in 2023.
US-China relations appear to be improving following the meeting between Chinese President Xi Jinping and US President Joe Biden in November 2023. This is important for the rest of the region – the risk of negative spillover effects from trade and investment conflicts as well as technology wars between the region's key economic partners is clear.
Nevertheless, significant risks remain for the US economy in 2024, particularly in the short and medium term. A soft landing is not guaranteed. While the news has been positive in recent quarters, the consequences of the massive monetary policy shift in 2023 could well be more severe in 2024 as the impact of monetary policy on the real sector is delayed.
Fiscal dysfunction also casts a dark shadow over the US economic outlook. The budget deficit rose quickly to $1.7 trillion in fiscal year 2023 from $1.4 trillion in fiscal year 2022. Gross national debt has increased to $33.2 trillion since the third quarter, from $5.8 trillion in 2000 US dollar – 120.1 percent of GDP – increased from 2023.
While the budget was a major policy issue in 2023, 2024 began with a promising budget agreement to keep discretionary spending essentially constant. There is pressure to increase spending, and in a presidential election year like 2024, spending could increase. However, with Congress particularly politically divided, any significant fiscal stimulus is unlikely, and the deficit could even narrow. Yet no political party appears to have a plan to address long-term fiscal challenges. This could well be an important issue after the election, if not before.
Geopolitical conflicts are a source of great uncertainty. In addition to Russia's war against Ukraine, the new war in the Middle East also has the potential to escalate with unpredictable consequences for the global economy, with Houthi attacks on ships through the Red Sea being a threatening example.
The 2024 US presidential election campaign will become increasingly intense until November 2024 – possibly later if the loser does not accept defeat. The polarization of US politics is leading to increasing division. It is no longer just between the Democratic and Republican parties, but also between factions within each party.
But both parties have adopted an inward-looking political stance. In fact, the Biden administration's international trade policy is largely similar to that of the previous Donald Trump administration, albeit with different rhetoric. The Biden administration has retained many of the Trump administration's tariffs and administrative measures. The Biden administration has failed to invest in new free trade agreements or revitalize the World Trade Organization, leaving its appeals body in limbo.
The admirable green goals of the Inflation Reduction Act (IRA) of 2022 have been marred by inward-looking content requirements. The US Congress is considering imposing a carbon tariff, motivated in part by the Carbon Border Adjustment Mechanism, which the European Union has already begun implementing. If Trump wins the 2024 presidential election, he promises to apply a flat 10 percent tariff and equalize foreign tariffs on an “eye for an eye, inch for inch” basis. Such Old Testament trade policies would be disastrous for both the region and the United States.
In short, slow but positive growth and falling inflation in the United States is a reasonable scenario and good news for the Asia-Pacific region. With the soft landing in 2023, US imports from the Asia-Pacific region – a key source of growth for this highly outward-looking region – are likely to increase in 2024.
Some regional economies such as Vietnam will benefit from further de-risking by China. Others, such as Australia, will benefit in part from aspects of the IRA that incentivize investment in green economy inputs such as lithium. But we live in a time of extraordinary uncertainty and devastating storms may be brewing.
- About the author: Michael G. Plummer is Eni Professor of International Economics at Johns Hopkins University and a nonresident senior fellow at the East-West Center.
- Source: This article is part of an EAF special series of articles looking back on 2023 and the year ahead.
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