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President Trump highlighted the record surge in real Groos Domestic Product (GDP) following the release of Q3 real GDP on Thursday. Nonetheless, the US deficit position is set to be one of the largest among developed countries and with more stimulus coming, the Federal Reserve (Fed) could act, hitting the greenback, economists at MUFG Bank report.

Key quotes

“A 40.7% surge in consumer spending in SAAR QoQ terms fuelled a 33.1% overall gain in GDP, reversing much of the 31.4% plunge in Q2. Real GDP in the US is now just 3.5ppts (14% in SAAR terms) below the pre-COVID peak at the end of 2019. This is a better performance than in major economies across the eurozone.” 

“Germany was set to perform the best of the major economies in Europe and if today’s Q3 rebounds at the consensus rate of 7.3% QoQ, real GDP will still be 5.0ppts below the pre-COVID peak. However, French GDP was released this morning with a stronger than expected QoQ gain of 18.2% recorded – that leaves real GDP 4.1ppts below the pre-COVID peak. We suspect the German GDP will outperform expectations. Spanish GDP is set to still be over 10ppts below the pre-COVID peak if the consensus gain of 13.5% QoQ is realised in data this morning.”

“President Trump will undoubtedly highlight Thursday’s GDP report in the run-up to the election on Tuesday. But the result does come at a price – the US fiscal deficit according to IMF projections is set to reach 18.7% of GDP this year, the largest amongst all advanced economies apart from Canada (19.9%). The US deficit position will remain worse than most countries throughout the IMF’s period of projections with more stimulus still to come. The Fed is going to have to play a role in curtailing upward pressure on yields, and that will likely undermine the dollar.”