International Money and Finance (Final stage 3) Essay - 1

International Money and Finance (Final stage 3) - Essay Example This is the second consecutive downgrade in our US forecast, which came into the year at 3.1%. We are clearly less optimistic now than we were even a few months ago, but the overall view is the same as it has been for the past three years: the US recovery will be characterised by fairly weak and erratic growth and low inflation, but we do not expect a double-dip recession. We continue to expect growth between 2.5-3.5% over the coming couple of years, which is way below where it 'should' be coming out of such a bad recession. Occasionally, the US economy may post some great quarters, and may post some really poor ones. The Q111 real GDP growth estimate, of 1.8% q-o-q annualised (as per the second estimate released on May 26), could be lumped into the latter category. Deceleration Across The Board In Q1 US - Real GDP Growth By Expenditure Category (q-o-q SAAR) Source: BEA, BMI Below Trend, Par For The Deleveraging Course Growth really should be somewhere north of 4.0% just to get the o verall level of output back to trend. Without faster growth, the unemployment picture will remain bleak. With such a disappointing pace of growth recovery, the US economy is roughly tracking the trajectory of other countries that experienced a major financial crisis and a prolonged period of deleveraging. We see some similarities in this respect to Japan, Sweden in the mid-90s, South Korea post-Asia crisis, etcetera. There is a rebalancing going on in the US away from consumption and housing and toward manufacturing and exports. We reiterate that this makes it an unusual US recovery, if only because American recoveries typically consist of residential investment and consumption picking up the slack, and this time around it is going to be, and has been, net exports and business investment. Not only was Q111 data pretty poor, it also revealed a downward revision to private consumption, and a boost from inventories, making the composition of growth pretty poor as well. This was especia lly a disappointment because the payroll tax cuts announced in December were expected to give a strong boost to consumption in the first quarter, but it looks like their effect was offset in part by higher oil prices. The house price double-dip and high unemployment obviously haven't helped. Our new forecasts have lowered our expectation for private consumption in 2011, if only modestly (from 3.1% to 3.0%; we had already revised down our estimate earlier in the year). On the upside, credit growth is showing some signs of life, and the labour market is slowly healing, so we do not believe that there is sufficient reason to get too pessimistic on the consumer. If oil prices drop in H211, and this is reflected by lower prices at the pump, real private consumption could get a boost. But if oil prices head higher again, expect more bad news from the consumer. High Oil Prices Remain A Risk US - Real Retail Sales (% chg y-o-y) Source: BMI Investment: Healthier, Ex-Housing Residential const ruction remains a drag on overall growth (just under 0.1pp in Q111), and data since then have not been good either. We would expect at least some contribution from residential investment later in the year, however, if only because the homebuilding industry cannot mathematically sink too much lower. Non-residential structure investment is also very weak (subtracting 0.48pp from growth in the quarter). We see few prospects for improvement in this sector in this environment. On the upside, though, equipment and software investment contributed 0.81pp