Recovery aggravates existing imbalances

While the economic recovery seems to have broadly maintained its strong pace in the third quarter, the latest national accounts contained signs that the recovery has exacerbated some of the economy’s existing weaknesses. Indeed, the current account deficit widened further to a horrendous 5.2% of GDP in Q2. And more of the growth in household spending over the last year or so appears to have been financed by a decline in the saving rate. Looking ahead, though, we continue to think that the foundations of the economy’s growth will strengthen, with further gains in consumer spending being funded by stronger growth in households’ real incomes and exports staging a modest recovery next year. Indeed, following growth of 3.2% this year, we continue to think GDP will grow by a robust 3% in both 2015 and 2016.