Official statisticians last week revised down their estimates of how quickly the US economy has grown since 2011 – from 2.2 to two per cent. This means the slowdown in productivity growth, of which the OECD warned last month, has been even greater than thought.
Steven Englander at Citi estimates that potential GDP growth - the growth rate consistent with stable unemployment and inflation - is now around 1.5 per cent compared to 3-4 per cent in the 80s and 90s. This, he says, “is as low as it has been for the last 60 years.”
This implies that growth of more than two per cent - which is what economists expect this quarter - would raise inflation. Because of this, warns Mr Englander, interest rates could rise “more quickly than the money markets are pricing in”; fed funds futures markets expect rates to be only one per cent even at the end of 2016. This, he says, could lead to a rise in the US dollar.
However, Ethan Harris at Bank of America Merrill Lynch believes the Fed is keen not to unsettle markets by raising rates too quickly. With inflation still low, he says, the Fed will make only a “slow exit” from near-zero rates.
What’s more, low potential growth should mean that the funds rate will peak at a low level. Whether stock markets will be comforted by still-easy monetary policy or unsettled by the low growth that causes it is, however, an open question.
