BBVA Research has raised its growth forecasts for US growth and now sees GDP at 2.8% this year and the next due to the strength of the global economy and the Trump administration’s fiscal stimulus.
In its United States Economic Outlook report for the second quarter of 2018, given that fiscal expansion coincides with an economy close to full employment, BBVA Research foresees a slight pick-up in inflation. It forecasts three rate hikes of 25 basis points this year by the U.S. Federal Reserve.
It expects the dynamism of the labor market, where 205,000 new jobs were created a month in the first quarter, to continue for the rest of the year with the unemployment rate falling to 3.9% in 2018 and 3.6% in 2019.
Favorable credit conditions
BBVA Research expects financial and credit conditions to remain favorable in the United States on both the supply and demand sides as witnessed by low corporate spreads and the rebound in bank lending.
“Equity prices, which were up 4.9% in 1Q18, will benefit from the tailwinds that the corporate tax reform brings, strong domestic demand and favorable global growth conditions. This will support consumer expectations and produce positive wealth effects,” the report adds.
According to BBVA’s research arm, recent tax changes to boost domestic demand and "corporate and individual tax cuts to boost growth in 2018 and 2019 by 40bp".
Separately, BBVA Research notes that the lack of domestic savings and stable consumption and investment outlook all but assures that the U.S. will borrow more from abroad to finance imports and investment. As a result, the current account deficit will widen.
For BBVA Research, while domestic political risks and cyclical headwinds remain, both are small. And while trade protectionism remains a major risk, the think-tank does not foresee a major impact on the trade deficit, consumer prices and economic growth. However, if tit-for-tat trade barriers were to escalate this could be costly for the United States.
Given that the current period of rising output will become the second longest on record this year, BBVA Research warns that cyclical “headwinds” could be building large fiscal expansion at a time when the output gap is positive and debt-levels are at dangerously high levels. It also has the potential to open up a severely adverse scenario that could tilt towards debt-deflation or stagflation like scenario depending on how the demand side responds to the fiscal impetus.
"If the tax reform is successful in lifting potential GDP, at least in the short-run, the chances of either extremely adverse scenario materializing will be small. As a result, we continue to anticipate that the growth outlook will remain bright", the report concludes.