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John Walker
Oxford Economics - Chairman
Milan, 14th June 2018
US Economic Outlook Good growth despite trade
tensions
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President Trump is doing bettert than many expected?
There are 35 Senate seats
(100) being contested.
26 seats held by Democrats
Senate:
Current: 51 Republicans
49 Democrats
House of Representatives:
Current: 235 Republicans
193 Democrats
7 Vacancies
All seats are contested
Key number is 218/435
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Private sector confidence remains upbeat
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Employment growth remains strong
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Fiscal Policy – Stimulus supports growth in 2018-19
• Tax Cuts & Jobs Act is worth $1.5 trillion over the next
decade. We expect real GDP growth in 2018 to be boosted by
0.4ppt.
• Bipartisan Budget Act boost discretionary spending by $300
billion and provides $90 billion in disaster relief. It will add
0.25ppt to GDP
growth in 2018.
https://www.oxfordeconomics.com/my-oxford/publications/412131https://www.oxfordeconomics.com/my-oxford/publications/418883
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...and wage growth slowly firming
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Forecast highlights
Overall, economic momentum remains strong with the US economy
expected to
growth 2.8% this year, and 2.2% in 2019
Global landscape remains more favourable than in 2015-2016
Domestic fundamentals are strong but some pockets of risk
With the output gap largely closed, we foresee inflation
approaching the Fed’s 2%
target and expect four rate hikes in 2018
But, the US economy is late cycle which means it’s more
susceptible to shocks
We should be on the watch for shocks from:
Fiscal policy Fed policy “Political policy”
Confidence
Stock prices
Private sector
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Savings have contributed half of consumption growth since
2015
-3
-2
-1
0
1
2
3
4
5
6
2011 2012 2013 2014 2015 2016 2017
Income contribution
Savings contribution
Real PCE growth
Source : Oxford Economics / Haver Analytics
US: Consumer spending growth attribution
%
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And higher oil prices will weigh on income/spending
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New orders for investment goods still rising
Trade concerns
weighing on
business orders?
Will we see further
boost from fiscal
stimulus?
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Part of the investment rebound comes from energy...
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Growth to remain solid, but moderate over time
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Uncertainty (trade + demand) will limit the upside
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Energy prices, dollar & growth push inflation higher...
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PCE inflation stabilizes around the Fed’s 2% target?
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Markets expecting more inflation and tighter Fed
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Productivity rebounding (gradually)
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Long-term rates: why so low given state of the economy?
Factors constraining yields:
• Expectations of rates are lower
o Lower productivity
o Ageing population
o Glut of savings
Lower real neutral rate
• Term premium lower
o Safe haven
o Fed’s QE
o Other Central Banks’ QE
*Tobias Adrian, Richard Crump, and Emanuel Moench (or "ACM")
estimate of the term premium
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What are the key risks for the US economy?
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Risk 1: Rising trade tensions
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Trade war would lead to important slowdown
Using Global Economic Model: • Assumes 25% trade tariffs on
China and 10% tariffs on South Korea and Taiwan (w/ retaliation). •
Assumes NAFTA exit by US.
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Risk 2: ‘‘Saving dip’’ & risks from financial market
strains
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Risk 3: Rising fiscal deficit causes problems
Key risk for 2019-2020:
1. Reduced marginal fiscal stimulus
2. Higher inflation
3. Tighter Fed stance
4. Wider deficit
5. Higher long-term borrowing cost
6. More protectionism
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Forecast highlights
Overall, economic momentum remains strong with the US economy
expected to growth 2.8%
this year, and 2.2% in 2019
Global landscape remains more favourable than in 2015-2016
Domestic fundamentals are strong but some pockets of risk
With the output gap largely closed, we foresee inflation
approaching the Fed’s 2% target and
expect four rate hikes in 2018
But, the US economy is late cycle which means it’s more
susceptible to shocks
We should be on the watch for shocks from:
Fiscal policy Fed policy “Political policy”
Private sector Confidence
Stock prices
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US economic forecast
2016 2017 2018 2019 2020 2021GDP 1.5 2.3 2.8 2.3 1.5 1.6
Private Consumption 2.7 2.8 2.4 2.0 1.7 1.8
Fixed Investment 0.6 3.4 4.6 3.5 2.0 2.2
Government Consumption 1.0 0.1 1.6 2.1 0.9 0.4
Exports of Goods and Services -0.3 3.4 4.0 2.7 2.9 3.2
Imports of Goods and Services 1.3 4.0 4.1 3.3 3.5 3.6
Stockbuilding (% of GDP) 0.2 0.1 0.2 0.2 0.2 0.2
Industrial Production -2.0 1.6 4.2 3.2 2.2 1.8
Consumer Prices, average 1.3 2.1 2.6 2.1 1.8 2.0
Current Balance (% of GDP) -2.4 -2.4 -2.9 -3.0 -3.2 -3.2
Federal Budget (% of GDP) -3.1 -3.4 -4.1 -5.1 -5.4 -5.7
Short-Term Interest Rates (%) 0.7 1.3 2.4 3.2 3.5 3.5
Long-Term Interest Rates (%) 1.8 2.3 2.9 3.3 3.5 3.6
Exchange Rate (US$ per Euro), average 1.11 1.13 1.20 1.22 1.25
1.25
Exchange Rate (Yen per US$), average 108.8 112.1 108.1 108.3
108.5 108.7
Forecast for United States
(Annual percentage changes unless specified)
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