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|August 4, 2014 10:05 AM EDT||
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T he US economy will accelerate slightly this year, with real GDP growth increasing to 2.1% from 1.9% in 2013. Stronger contributions from personal consumption expenditure growth will be offset somewhat by slower fixed investment growth and a contraction in government spending, as well as a negative contribution from net exports. The federal government's fiscal accounts will show another year of substantial improvement, due to stronger revenue collection and continued fiscal restraint due to the budget sequester. We forecast the deficit will narrow to 3.0% of GDP from 4.0% of GDP in 2013. S tronger domestic oil and gas production will reduce the need for imported energy again in 2014, but this dynamic will be offset by accelerating domestic economic activity, which will boost imports. We forecast a current account deficit of 2.2% of GDP in 2014, the narrowest since 1997.
We continue to believe that the US Federal Reserve will wind down its current quantitative easing programme by end-2014, despite weak economic data in the first quarter of the year. That said, we acknowledge that substantial slack remains in the labour market, and in light of a weak inflation outlook we do not anticipate the first hike to the Fed funds rate until H215. We believe that Republicans are heavily favoured to retain control of the US House of Representatives and slightly favoured to take control of the Senate from Democrats in November mid-term elections. As a result, we believe the final two years of President Barack Obama's second term will be marked by renewed legislative efforts by Republicans to roll back key parts of the Affordable Care Act health reform law, his signature legislative achievement, as well as the potential for additional tax and spending cuts. Such initiatives could set the stage for a return of the type of legislative brinksmanship that has become common in recent years, elevating policy risk substantially.
Major Forecast Changes
We have revised down our 2014 real GDP forecast to 2.1% from 2.4% previously. The downward revision is due to base effects from a 2.9% contraction in Q114. We do not believe that this weak growth print was the start of a sustained slowdown in the US economy. W e expect the current account shortfall to narrow only slightly this year, forecasting a 2.2% of GDP deficit in 2014, compared to our earlier forecast of 2.1%. The slower narrowing is due to a weaker goods trade account through the first five months of 2014.
Executive Summary.... 5
Chapter 1: Political Outlook.. 7
SWOT Analysis.... 7
BMI Political Risk Ratings. 7
Domestic Politics .... 8
First-Ever House Majority Leader Defeat Makes Compromise Less Likely....8
The defeat of US House Majority Leader Eric Cantor by a virtually unknown challenger will set back bipartisan efforts on immigration
reform and raise the spectre of a return to the politics of brinksmanship that had become prevalent in recent years on the budget, taxes,
and debt policy.
table: political overview....8
Foreign Policy 9
US Geopolitical Reversals Temporary, Iran And SE Asia Offer Opportunities...9
The US's geopolitical influence will continue to weaken over the next few years due to setbacks in Ukraine and the Levant. However,
over the long term, Washington has major opportunities to strengthen its position through a rapprochement with Iran and closer ties with
South East Asian states, as well as India.
Long-Term Political Outlook 12
Tough Challenges In The Coming Years..12
The 2010s continue to be challenging for the US, mainly due to the aftermath of the 2007-2009 recession and several unresolved foreign
policy issues. Meanwhile, two of the main trends in US politics will be the rise of the south-western states and Hispanic-Americans as key
Chapter 2: Economic Outlook.. 15
SWOT Analysis.. 15
BMI Economic Risk Ratings. 15
Economic Activity.. 16
Only A Slight Acceleration Due To Q1 GDP Contraction.16
The US economy's Q114 real GDP contraction of 2.9% will yield to positive growth over the coming quarters, as labour market
tightening and strong consumer confidence bolster household spending, and fixed investment picks up. The base effects from weak Q1
growth, however, have prompted us to revise down our 2014 real GDP forecast from 2.4% to 2.1%, implying only a slight acceleration
from 1.9% growth in 2013.
table: GDP By Expenditure 16
Exchange Rate Policy 18
USD: Current Account And Monetary Normalisation To Bolster Dollar..18
The US dollar is approaching or testing key support levels against the euro and the pound sterling, which we expect to hold, forecasting
the dollar to appreciate against both currencies in H214 and into 2015.
table: BMI Currency Forecast...18
Balance Of Payments . 20
Current Account Deficit Narrowing To Resume In H214..20
A multi-year trend of strong growth in domestic energy production will continue to narrow the US current account deficit over the next
several years. However, weaker than expected trade dynamics in Q114 have caused us to revise our 2014 current account forecast
from a deficit of 2.1% of GDP to 2.2% of GDP, only slightly narrower than the 2.3% deficit recorded in 2013.
table: Current Account20
Fiscal Policy . 22
Budget Shortfall To Narrow To Long-Term Average In 201422
The US federal budget deficit will narrow from 4.0% of GDP in 2013 to 3.0% in 2014 due to another year of fairly strong revenues, the
result of greater payroll and income taxes, as well as what we forecast will be no growth in spending this year.
table: Fiscal Policy....23
Monetary Policy 25
Taper Over In H214, First Hikes In H215..25
Strengthening macroeconomic data will enable the US Federal Reserve to conclude its asset purchasing programme by end-2014. We
expect the first rate hikes in H215, brin ging the Fed funds rate to 0.75% by the end of 2015.
table: Monetary Policy 25
Chapter 3: 10-Year Forecast 27
The US Economy To 2023.... 27
Slowing Growth Over The Next Decade...27
The US economy's pace of growth is set to slow over the next 10 years to a long-term rate of 2.4% as deleveraging from a massive
credit binge and demographic shifts takes their toll. Nonetheless, BMI believes that the US is going to remain the world's greatest
economic power over our 10-year forecast period and beyond.
TABLE: Long-Term Macroeconomic Forecasts..27
Chapter 4: Business Environment 31
SWOT Analysis.. 31
BMI Business Environment Risk Ratings 31
Business Environment Outlook 32
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS...32
TABLE: BMI LEGAL FRAMEWORK RATINGs33
TABLE: LABOUR FORCE QUALITY.34
Market Orientation.. 35
TABLE: TRADE AND INVESTMENT RATINGS....35
Operational Risk 36
table: Top Export Destinations, 2002-2009 36
Chapter 5: Key Sectors.. 39
Pharmaceuticals & Healthcare.. 39
table: Pharmaceutical Sales, Historical Data And Forecasts40
table: Government Healthcare Expenditure Trends, Historical Data And Forecasts... 41
table: Healthcare Expenditure Trends, Historical Data And Forecasts .... 41
table: Private Healthcare Expenditure Trends, Historical Data And Forecasts... 42
table: Telecoms Sector - Mobile - Historical Data & Forecasts 43
table: Telecoms Sector - Internet - Historical Data & Forecasts . 44
table: Telecoms Sector - Wireline - Historical Data & Forecasts.. 44
Chapter 6: BMI Global Assumptions. 47
Global Outlook... 47
Global Recovery Still On Track..47
Table: Global Assumptions....47
Table: Developed States, Real GDP GrowtH, %.48
Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %.. 48
Table: Emerging Markets, Real GDP Growth, %49
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