U.S. economy solid for now, but recession risks edge higher

U.S. economy solid for now, but recession risks edge higher

By Shrutee Sarkar

BENGALURU (Reuters) - The U.S. economy is likely to lose momentum after a strong performance in the quarter just ending, with the threat of a global trade war lifting the chances of a recession in the next two years, according to a Reuters poll.

U.S. gross domestic product growth was forecast to average 2.9 percent for 2018 in a poll of over 110 economists taken June 19-25, an upgrade from the previous month and the highest since polling began for the period in May 2016.

For the current quarter, the economy was forecast to grow at an annualised pace of 3.7 percent, up sharply from the 3.0 percent forecast a month ago. If realized, that will the highest growth rate since the second quarter of 2015.

But that is likely to be the peak, with growth in the economy, currently on its second-longest run on record, expected to gradually slow over the next two years.

The median probability of a recession in the next two years edged up to 35 percent in the latest poll, compared to a touch below a one-in-three chance a month ago. Forecasts ranged from 15 percent to 75 percent.

That rise was driven in part by growing concerns about the blowback to U.S. industry and the wider economy from President Donald Trump's trade battles, now overshadowing optimism about the boost from aggressive tax cuts passed late last year.

Economists at Bank of America Merrill Lynch analysed the impact of a trade war on the U.S. economy based on the Fed's large-scale equilibrium macroeconomic model and said it showed "a notable drag on growth."

"This suggests that the boost to growth expected from fiscal stimulus - e.g., tax cuts and greater federal government spending - will essentially be offset by the negative trade shock," wrote BofAML's U.S. economists Joseph Song and Stephen Juneau, in a note to clients.

"Our calculations suggest that a major trade war would lead to a significant reduction in growth. A decline in confidence and supply chain disruptions could amplify the trade shock, leading to an outright recession."

While the cost to the U.S. economy of the current imposed tariffs so far has been small, several economists said they expect the impact to be deeper if more protectionist measures were to be imposed.

"The imposition of tariffs on half of our imports from China would likely have more pronounced indirect effects for two main reasons," noted Gregory Daco, head of U.S. macroeconomics at Oxford Economics in New York.

"First, the tariffs on $200 billion of imports would affect a wide array of business sectors including some with significant supply chain multipliers - i.e., sectors where each dollar of activity generates more than a dollar of activity in other sectors. Second, the potential financial market and confidence impact would be substantial."

For now, only about a tenth of nearly 60 economists have a recession probability of greater than 50 percent in two years. For the coming year, the median probability held steady at 15 percent, with forecasts in a 5-30 percent range.

Average GDP growth forecasts for next year and 2020 were comparatively lower, at 2.5 percent and 1.8 percent, respectively, but largely unchanged from the previous poll.

The economic outlook for the euro zone and Britain over the next two years follows a similar direction and at a lower speed, indicating a gradual slowdown after 2018, according to separate Reuters polls conducted this month. [ECILT/GB] [ECILT/EU]

This underscores how the global economy is relying more and more on the U.S. for momentum.

TIGHTER TIMES AHEAD

The more subdued growth outlook comes at a time when there is a global shift in central bank policy away from crisis-era easy monetary policies.

This month, the European Central Bank pledged to shut its over 2.5 trillion euro bond buying programme by end-year and the Bank of England appears poised, albeit after bottling a widely expected move last month, to raise rates relatively soon.

The Fed, for its part, raised the federal funds rate in June by 25 basis points to 1.75-2.00 percent, pushing interest rates above inflation for the first time in over a decade and is nowhere near close to stopping.

The central bank signaled two more increases this year, higher than previous projections. If that comes true, it will make a total of four rate hikes for 2018, a view held by economists in Reuters polls since March.

Nearly 85 percent of over 100 economists forecast the fed funds rate in a range of 2.25-2.50 percent by end-2018.

The Fed is then expected to raise rates twice more in 2019, according to around 90 percent of a sample of over 70 economists. But that is one hike less than the three suggested for next year by the Fed's own "dot plot" forecasts.

(For other stories from the global economic outlook:)

(Additional reporting by Indradip Ghosh; Polling by Anisha Sheth; Editing by Ross Finley and Chizu Nomiyama)

This story has not been edited by Firstpost staff and is generated by auto-feed.


Updated Date: Jun 27, 2018 06:05 AM

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