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Policy Uncertainty Makes US Forecast Difficult

The weak first quarter in the US can be interpreted as a splutter rather than a change in the fundamental trajectory of the US economy
The recent “soft patch” also meant that the Fed does not need to be overly aggressive as it raises interest rates,  the next of which is expected next month.The recent “soft patch” also meant that the Fed does not need to be overly aggressive as it raises interest rates,  the next of which is expected next month.

The dip in the US economy is a "splutter" rather than a more serious downturn, the International Monetary Fund's chief economist said, though policy uncertainty in Washington was making forecasting increasingly difficult.

In an interview with Reuters, Maurice Obstfeld, who is nearing his two-year anniversary as the IMF's top forecaster, said China's economy was also slowing, though both the eurozone and Japan were performing better than expected.

The fund's last set of forecasts in mid April nudged up its global growth projections to 3.5% for this year and 3.6% for next year. Since then, however, there have been some shifts in the landscape.

A string of controversies surrounding US President Donald Trump's administration have put his plans to cut taxes and increase infrastructure spending on the back-burner, taking some of the steam out of the world's top economy in the process. Revised first quarter US GDP numbers due later are expected to confirm it grew at less than 1%.

"We saw the weak first quarter in the US that we interpret as a splutter rather than a change in the fundamental trajectory of the US economy ... A soft patch in other words," Obstfeld said on the sidelines of a City Week conference on Thursday.

"And in the second quarter we have seen China taking some pretty energetic measures to slowdown credit growth and get a better grip on what is going on in the shadow banking sector. "That seems to have taken some of the froth out of the economy. So we see a bit of slower growth there."

It is too early to say for sure whether the two factors would see the IMF lower its next set of global forecasts in July. The process is not yet in full swing, but the task is also being made more complicated than normal by a lack of clarity and mixed messages over US policy.

Obstfeld said that while there was now a rough outline of what Trump would like to do, Paul Ryan, one of the other senior members of the Republican party, seemed to have different views.

"It's hard to say what exactly will happen and what the macro impact will be," Obstfeld said. "We are working to find out what is the most likely scenario and what impact that will have on growth and our forecasts. We don't know when or what the fiscal initiative will be, so I think markets are kind of looking at this and saying show us the money."

Go Slow

There have been upside surprises since April, however, that are helping balance some of the US and Chinese loss of momentum. A weaker dollar and lower bond yields was a potential boost for emerging markets and other global borrowers.

Japan is performing better than already raised expectations as is the eurozone, which this month saw France elect pro-business Emmanuel Macron over the anti-euro Marine Le Pen and is being driven by a humming German economy.

"If you look at the soft indicators, PMIs, even in France where the hard indicators have not been amazing, you get some hint there might be an upside surprise," Obstfeld said.

The strengthening eurozone recovery has also fuelled talk that the European Central Bank will cut its stimulus program again by the end of the year. The IMF, as usual, though is urging it to take things slowly.

Asked whether it would be wise to tread carefully with stimulus removal, he said: "That would be my view." The recent US "soft patch" also meant that the Fed does not need to be overly aggressive as it raises interest rates, the next of which is expected next month. "In view of the weak first quarter and the fact wage growth is still low, I don't think they feel a huge danger they are going to get behind the curve," Obstfeld said. "I don't think they are wedded to any particular number of rate increases this year, two versus three, for example."

 

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