Keith Wade, Chief Economist & Strategist at Schroders, comments:
"The debt ceiling debate has been resolved and the world economy may have dodged a bullet, but as we refocus on the recovery it is clear that the US is not performing as well as expected.
In the light of the disappointing Q2 GDP and ISM reports we are cutting our growth forecast. Our baseline forecast of 2.6% now becomes 1.8% for 2011. Of the 0.8 percentage point downward revision, three quarters is the base effect from a weaker H1. However, we have trimmed our estimate for the second half to reflect the continuing weakness of the economy in July. For 2012 we now expect 2.7% growth (previously 2.9%)."
Modest pick up in the second half of the year as headwinds fade
"Whilst the economy has disappointed thus far, our forecast still looks for some acceleration in H2. First, the effect of the Japanese earthquake on supply chains was apparent in Q2 with a 23% fall in expenditure on motor vehicles, which took 1 percentage point off consumer spending. This should reverse in H2 as Japanese exports and inventory are rebuilt. Second, the effect of inflation on real growth is apparent in the figures as in nominal terms growth has been steady at 1% q/q for the past four quarters. Higher inflation has squeezed real GDP but, as with the supply chain effect, the impact will diminish as commodity prices have stabilised. Finally we are still looking for an increase in corporate spending on the back of strong profits and cash flow. However we acknowledge that the uncertainty caused by the debt ceiling debate may have caused companies to delay expenditure decisions."
Fiscal stimulus is over
"Growth would be stronger next year if the 2% cut in payroll taxes were extended, but it is difficult to see this getting onto a bill let alone through Congress before the end of the year. The cuts agreed as part of the package to lift the debt ceiling are implemented over ten years and will have little impact next year, but fiscal policy will contract unless this year’s package is extended. IMF figures suggest a tightening of 1.5% GDP in 2012 as a result. After the tortuous debt ceiling debate, it is clear that fiscal stimulus is no longer on the agenda. Indeed, it is likely that further tightening will need to be announced if the US is to retain its AAA rating as the $2.4 trillion cuts fall short of what most would see as necessary to stabilise the debt (S&P have mentioned a figure of $4 trillion). Such an outlook puts more onus on monetary policy and, whilst we do not see the return of QE, we have pushed out our first Fed rate rise to September next year."
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