Economic Momentum To Gain An Inch, Not A Yard
- The U.S. economy has progressed largely as expected since our previous forecast. But, with new leadership in Washington, the outlook is cloudier than usual.
- Economic growth is expected to run at 1.6% for 2016, before picking up to roughly 2.0% over the next two years. Until there is greater clarity on which policies the new administration will enact, our macroeconomic forecast does not incorporate new fiscal policy measures.
- As it has over the past year, consumer spending will lead economic growth. Business investment stages a modest improvement, while a stronger U.S. dollar makes net trade a larger drag than previously expected.
- Future fiscal policy changes also pose upside and downside risks for monetary policy. For now, we continue to expect a cautious pace of rate increases of one 25 basis point hike in each of 2017 and 2018, taking the funds rate to 1.25% by the end of 2018.
- Global growth is expected to pick-up to 3.3% through 2018, consistent with its trend rate and broadly unchanged from our previous forecast.
- We remain cautious on the stronger growth and reflation theme that has been driving recent market euphoria for a number of reasons. Most importantly, global excess capacity will dampen inflation, and stimulus measures in the U.S. are likely to underwhelm.
- The main forces driving our outlook include a continuation of highly accommodative monetary policy, increased fiscal stimulus, the ongoing recovery of commodity exporters, and slow and steady implementation of structural reforms.
- While emerging markets are expected to remain the main driver of growth, tighter financial conditions, the high U.S. dollar, and anti-trade measures could provide significant headwinds. Moreover, elevated political uncertainty could weigh on the outlook for the Eurozone.
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