Question

Your consulting firm has been hired by an important European-based multinational conglomerate, ' GKY Group'. The Group has required assistance for designing its long term global strategy.

The CEO, Mr. Lundberg, is particularly interested in understanding the long term growth potential of the U.S economy. Until now his company has had an aggressive expansion strategy in the U.S. This strategy has been based on a combination of acquisitions of smaller competitions, as well as major investment in expanding the group's own U.S plants.

Answer 1

There are several aspects that need to be considered to assess the long term growth potential of the US economy.

The most important consideration at the moment is understanding the impact of the COVID-19 pandemic. Millions of people have already lost their jobs as reflected in the data from unemployment benefit claims and the economy is al set to register a strong negative growth for the next few quarters. Although the shock is short term at present, it can generate long-run consequences. if one the virus is controlled, the people who have lost jobs can not be accommodated in the new economy due to lack of demand, this will further the negative income shocks as people do not have purchasing power. This lack of aggregate demand will impact the profitability of firms and they will cut back on supply. The GDP growth can stay low for a long period.

Managing government debt and fiscal deficit is another important aspect for long term growth. Due to the pandemic, the fiscal deficit of the government will rise substantially, which will have to be lowered once the things are back to normal. This will involve cutting even profitable government expenditure and raising taxes. This can impact the long run growth adversely.

Even before the virus, the US economy had slowed down amidst the concerns created by the trade war. A lot of small scale businesses that depend on cheap imports became uncompetitive and closed. Medium and small scale industries are the backbone of the economy and need to be sustained. The slowdown was visible in the form of inversion of the yield curve which is a strong predictor of a recession. Although the trade war began to dampen, the virus will further reshape trade relations between the entire world and may cause added uncertainty.

Political uncertainty is another factor. President Trump has been fairly eccentric in his economic approach. An election later this year will decide who takes the country's top post. A change in the party in power means that they can easily roll back on some of the controversial policies initiated by Trump such as the tax cut and healthcare. This can affect the long term economic growth through added uncertainty.

Thus, overall the medium-long run growth projections fir US do not seem too strong and it will need to do really well to achieve even its average growth for last few decades i.e 2% per annum.