By Mike Eggleton, Senior Manager Analytics & Research
U.S. economy drives the global outlook
The global economy continues its recovery, with growth likely to rise from 2.3% last year to 2.6% in 2017, strengthening further to 2.9% in 2018 (Figure 1). The U.S. economy plays an important role in this improving outlook, particularly if the Trump administration delivers a fiscal package (worth US$1.2 trillion over the next decade) to stimulate growth. Trump’s stimulus program should promote an acceleration in U.S. economic growth from 1.6% to 2.1% in 2017 and 2.6% in 2018. Global confidence among business, investors and consumers is already rising in anticipation of the positive side effects stronger U.S growth could have for the rest of the world.
But there are also some risks arising from Trump’s stimulus program. In particular, a stronger U.S. economy may persuade the Federal Reserve (Fed) to raise interest rates further during 2017. This will strengthen the dollar, making U.S. products and services less competitive in export markets. And it will put extra pressure on emerging markets
that have high levels of dollar debt.The global economy continues its recovery, with growth likely to rise from 2.3% last year to 2.6% in 2017, strengthening further to 2.9% in
2018 (Figure 1). The U.S. economy plays an important role in this improving outlook, particularly if the Trump administration delivers a fiscal package (worth US$1.2 trillion over the next decade) to stimulate growth. Trump’s stimulus program should promote an acceleration in U.S. economic growth from 1.6% to 2.1% in 2017 and 2.6% in 2018. Global confidence among business, investors and consumers is already rising in anticipation of the positive side effects stronger U.S growth could have for the rest of the world.
Risks facing the U.S. economy
Infrastructure spending may be modest
President Trump wants to kick-start infrastructure investment worth $1 trillion over the next ten years. But $870 billion of this needs to come from the private sector and given the generally low return typically associated with such projects, it’s hard to imagine that sector getting heavily involved. The actual boost to the U.S. economy could end up being rather modest, at just $200 billion.
Immigration policies may affect growth
The immigration saga continues with a series of executive orders, lawsuits and appeals. The latest travel ban, which has already been blocked by a judge, affects just 0.1% of arrivals to the U.S, but it has a much greater symbolic impact. It’s seen as part of a wider immigration policy, which may have negative effects on the U.S. economy in a number of ways:
- Over 11 million illegal immigrants are estimated to be living and working in the U.S. Deporting 600,000 per year could knock 0.2-0.3 percentage points from annual economic growth.
- International students contributed $30-35 billon to the U.S economy in 2015. Concerns about the ease of travel could put this income at risk.
- Tourism could also be hit. Tourism Economics has lowered its growth outlook for overseas arrivals in 2017 from 3% to -3% in response to the travel bans.
Together these could subtract around 0.5 percentage points from U.S. economic growth.
Trade policies may be counter-productive
If the U.S. imposes trade restrictions on its partners, it risks retaliation from them, and this will hurt U.S. exports. And if these restrictions lead to lower U.S. imports too, then there’s every chance that costs for consumers and business will rise:
- There’s no guarantee that perfect substitutes exist for all previously imported goods.
- Home-produced goods may be more expensive than those the U.S. currently imports from lower-cost countries like China and Mexico.
The U.S. has already withdrawn from the Trans-Pacific Partnership (TPP). President Trump has also signaled a desire to renegotiate the North American Free Trade Agreement (NAFTA) with Canada and Mexico.
How the U.S. is performing
Since the end of 2014, annualized quarterly economic growth has typically ranged between 1% and 2% (Figure 2). Future momentum depends on expectation – of less regulation, lower taxes and higher infrastructure spending.
The labor market remains strong, adding around 200,000 jobs per month, and this is supporting gradual wage growth. This will help households, as they face a slowdown in real disposable income growth. Inflation is picking up as energy prices increase year-over-year (y-o-y) and food prices fall at a slower pace. Rising inflation may persuade the Fed to bring forward its plans for its next interest rate rise. Consumers are generally spending within their means at the moment, so they may welcome the prospect of Trump’s tax cuts.
Solid income growth, the gentle release of pent-up demand and generally affordable low interest rates ensure that housing activity remains positive. But rising interest rates and not enough housing construction are now pushing up house-buying costs, denting the prospects for this sector.
Business investment remains relatively weak. But the outlook is improving. Rising oil prices, up by a third over the last year, may persuade the oil & gas sector to resume investment. Leading indicators for capital goods orders look encouraging too. After a modest contraction in 2016, business investment should grow 3% in 2017. But businesses will remain cautious until they fully understand the implications of Trump’s policies. Business uncertainty is at its highest level in more than 25 years.
The strength of the dollar remains a risk, particularly to U.S. exporters. It’s appreciated by around 20% since 2014. Exporters must also deal with slower demand growth from China, which is adopting an economic model that’s less reliant on imports.
What this means for travel
It’s easy to get distracted by issues grabbing the headlines, such as the travel ban(s) and their effects on the inclination of travelers to visit the U.S. in the future. These have had some impact on business travel, but this will most likely be short-lived. Such actions may deter foreign visitors, and weaker demand may place some downward pressure on airfares. But airlines seem less convinced of the long-term risks and continue to add capacity to the U.S.
The latest ban on electronic devices may be more significant. It applies to flights to the U.S. from 10 airports operated by airlines from eight countries in North Africa and the Middle East, including the U.A.E. and Turkey. The inconvenience this creates for some connecting travelers may persuade them to abandon the Gulf in favor of European hubs. This would boost demand on transatlantic flights operated by U.S. and European carriers. Travelers could face higher fares and more limited availability.
The U.K. has followed the U.S. move, but its restrictions do not apply to flights originating in Kuwait, Morocco, Qatar and the U.A.E. 
But it’s the bigger economic picture that matters most to business travel. Business investment plays a major role in driving growth in business travel spending in the U.S. (Figure 3). The Trump administration promises a substantial increase in infrastructure investment. Even if it delivers only on part of this, the prospect of such a stimulus from 2018 could provide an extra lift to business travel spending starting in 2017.
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 Oxford Economics, March 2017
 Oxford Economics, March 2017
 National Federation of Independent Business small business uncertainty index
 Buying Business Travel, Electronic devices banned on some US-bound flights
 The Independent, March 22, 2017, Britain to follow US with ban on electronic devices