US: Risks brewing - BNPP

Analysts at BNP Paribas has a baseline forecast for US growth of 2.2% in 2017, and 2.8% in 2018.

Key Quotes

“We see two sources of upside risk to US growth in H1 2017: 1) the fact that the economy was already gaining momentum before the election; 2) animal spirits.”

“Downside growth risks include the possibility of trade wars and geopolitical tensions, failure to deliver the fiscal stimulus proposed, and/or an excessive tightening of financial conditions.”

“The US economy has outperformed lately: the Bloomberg US economic surprise index is at its highest level since mid-2014. Upside surprises have been fairly broad-based, suggesting the economy is on slightly stronger footing near term. These developments have introduced upside risk to our H1 2017 growth outlook of 2.2%. On the other hand, President elect Trump has increased uncertainty regarding US trade policy and the Fed appears to be in no mood to join a fiscal party with unemployment already at 4.6%. The possibility of escalating geopolitical tensions and excessive tightening of financial conditions (particularly through exchange rate channels) are important downside risks to the growth outlook.” 

“The US economy was already gaining momentum ahead of the election; we may have underestimated this strength. The contraction in oil investment was fading before the election, and leading indicators of equipment investment were already improving. Corporate profits showed signs of life starting in Q3. Households earned more income in Q2 and Q3 than the BEA initially estimated, and the weakness in residential investment earlier in the year seems to have reflected temporary factors that are now fading. If the economy was healthier than we thought before the election, growth could exceed our forecast in the near term, irrespective of what happens on the fiscal front.”