2017 growth forecast for U.S. remains unchanged for now

Recent data shows that consumer spending remains on track, but we see prospects dimming for economic growth in H1 2017, before rising again in H2 thanks to fiscal stimulus.

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Figures released on November 15 show that core retail sales in the US rose by a strong 0.8% month over month in October, well above consensus expectations. Moreover, figures for the previous months were revised up. We believe consumer spending will grow by around 2.5% q-o-q annualised in Q4 (2.1% in Q3) and that it should settle at 2.5% on average in 2017 as well (after 2.6% in 2016).

There is greater uncertainty over prospects for GDP growth in the US. However, we are basically working on two hypotheses. First, although Congress is likely to water down Trump’s budgetary proposals, we still expect a substantial fiscal stimulus programme that could add 0.5-1.0% to US GDP in 2017-2018. The positive impact should start to be felt by the autumn of 2017. Second, our best guess remains that President Trump will prove much more moderate than Candidate Trump when it comes to trade protectionism and clamping down on immigration. We therefore expect measures in these areas to have only a very modest impact on growth and inflation, at least for next year.

The US dollar has appreciated by more than 3% since Trump won the presidency, moving slightly above the highs seen at the beginning of this year. Together with the spike in long-term interest rates, this has resulted in a marked tightening of monetary conditions. We estimate this tightening to be equivalent to more than a 50 basis point increase in short-term rates.

As this tightening in monetary conditions is due to anticipations of higher growth and higher inflation in the US, and not to weakness abroad or a more hawkish Fed, we don’t think it will lead to the Fed changing its plans to hike rates in December. We continue to expect the Fed to raise rates by 25 basis points in December, with two additional 25bp hikes in 2017.

However, tighter monetary conditions could weigh on growth in H1 2017, as could continued uncertainties surrounding the policies of a Trump administration, before the widely expected fiscal stimulus boosts growth in H2. Although our forecast that GDP growth will average 2.0% in 2017 remains unchanged for the time being, we are cutting our expectations for H1 (to an average of 1.7%), while we are raising our expectations for H2 (to 2.4%).

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