The US was exceptional in many ways last year. A large fiscal expansion accelerated growth while the world was slowing. Core inflation as measured by the personal consumption expenditures price index climbed to the US Federal Reserve’s 2 per cent target for the first time in more than six years but remained stuck far below target in Europe and Japan.
The Fed confidently raised interest rates every quarter and shrank its balance sheet while the European Central Bank and the Bank of Japan continued to conduct quantitative easing. With tax cuts boosting profits, US stocks outperformed most others and wider growth and interest rate differentials sent the dollar higher with adverse consequences for emerging markets.
But this year, US exceptionalism looks set to fade on several fronts. For starters, the growth gap between the US and the rest should narrow significantly.