USA Economic Forecast

See original or updated article

The Republican president, George Bush, faces a Congress dominated by the Democrats. Given constitutional checks and balances, this will make it difficult for both Democrats and Republicans to advance their often competing agendas. Instead, both parties will focus on preparing for the 2008 presidential and congressional elections. Federal finances have improved, but there is limited resolve to tackle looming holes in healthcare and public pensions programmes. Monetary policy tightening has ended, with the next move by the Federal Reserve (central bank) expected to be an interest rate cut in September 2007. But higher interest rates are having an adverse effect on the housing market, with knock-on effects on the consumer sector. Real GDP growth is thus forecast to slow from 3.4% in 2006 to 2.5% in 2007. Growth will pick up to 2.8% in 2008, but will not be as consumer-led as in recent years. Imbalances in the economy could trigger a much less benign scenario. The US dollar will come under further downward pressure in 2007 from the prospect of lower rates. The current-account deficit will average 5.6% of GDP in 2007-08.


Key changes from last update


Political outlook
Congress may renew the president's trade promotion authority, even if just for afew months. This would allow the White House time to negotiate a deal under the Doha round of multilateral trade liberalisation talks. But the Democrats will want major concessions in exchange for their support.

Economic policy outlook
The fiscal outlook has improved in the short term, based on higher than expected growth and renewed resolve to tackle the deficit. The Economist Intelligence Unit now forecasts that the deficit will average 1.8% of GDP in fiscal year 2006/07 (October-September) and in 2007/08.

Economic forecast
The economy expanded by an annualised 3.5% in the fourth quarter of 2006, as consumers remained resilient in the face of falling house prices. We have revised upwards our forecast for average growth in 2007 to 2.5%.