US Economic Forecast

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The Republican president, George W Bush, faces a Congress controlled by the Democrats. This makes it difficult for Democrats and Republicans to advance their competing agendas. The Economist Intelligence Unit expects the Democrats to win the next presidential and congressional elections in 2008. Federal finances have improved, but there is limited resolve to tackle looming holes in healthcare and public pensions programmes. The next move by the Federal Reserve (central bank) is expected to be an interest rate cut in the fourth quarter of 2007. A slump in the housing market will depress private consumption. Real GDP growth is thus forecast to slow from 3.3% in 2006 to 1.9% in 2007 before recovering to 2.4% in 2008. The US dollar will depreciate further during 2007. The current-account deficit will fall to just under 6% of GDP in both 2007 and 2008.

Key changes from last update

Political outlook

Legislation to overhaul immigration law by establishing a guestworker programme and creating a path to citizenship for illegal aliens was stopped in the Senate. Immigration reform, a priority for Mr Bush, is virtually dead.

Economic policy outlook

As expected, at its end-June meeting the Federal Reserve kept its benchmark interest rate at 5.25%, citing the risk of continued upward pressure on inflation. We maintain our forecast of a 25-basis point rate cut in the fourth quarter, reflecting our view that growth in the second half of 2007 will be below trend and that this will largely be driven by the continued problems in the housing market. The risks to growth and inflation are, however, carefully balanced, and the central bank may yet hold rates steady into 2008.

Economic forecast

Two major indices of consumer confidence fell in June to ten-month lows. This, coupled with further signs of weakness in the housing market and the recent rise in bond yields, supports our cautious view of private consumption prospects. We therefore maintain our GDP forecast for 2007 at 1.9%, rising to 2.5% in 2008.