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No Fast Turnaround For US Economy

FYI | Mar 20 2008

By Chris Shaw

According to National Australia Bank group chief economist Alan Oster the outlook for the US economy continues to worsen, with the headlines focused on the financial market problems but rising food and energy prices also having an impact.

Factoring in the latest data sees Oster cut his GDP growth forecast for the US for 2008 to just under 1.25%, with the economy expected technically in recession in coming months if his estimate of falling output in both the first and second quarters of the year comes to pass.

While the recession forecast is no surprise what is of interest is Oster’s view that any strong recovery in the overall economy will not occur before the second half of 2009 thanks to the time it will take for banks to repair their balance sheets, which is a more bearish outlook than many in the market who have factored in a recovery by the second half of this year. Reflecting this, Oster has cut his forecast for GDP growth in 2009 to 2.25% from 3.0% previously.

Oster’s view takes account of the likelihood of further cuts in official interest rates, NAB’s forecast being for rates to hit 1.5% by the middle of this year as against 2.25% now. This move should take the form of a further 0.5% cut in April and a 0.25% cut in June, while there remains scope for cuts beyond this level depending on the economic newsflow in coming months.

While the stimulus package proposed by President Bush and substantial income tax rebates will put something of a floor under household spending through the middle of the year there may be a payback later in 2008 in Oster’s view so consumer spending growth should be sluggish until the middle of 2009, while he also expects any recovery in residential construction to only become apparent early next year.

Assuming the economy picks up next year Oster sees scope for the Fed to be aggressive in removing the stimulus of lower rates, especially as there remains some inflation risk and there will be pressure to avoid another possible asset price bubble.

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