Deloitte's baseline forecast for US economy optimistic

For the first time since the COVID-19 pandemic, Deloitte has included a scenario that is more optimistic than its baseline, as it sees room for positive structural changes in labour markets and productivity.

“It is looking increasingly as though policymakers have managed to create the conditions for the mythical ‘soft landing’, where inflation is brought down to target without causing a recession,” Deloitte said in a release.

Although inflation has come down significantly, it is stubbornly resisting moving into the 2-per cent range.

In the baseline scenario (70 per cent), the economy’s strength is expected to moderate a bit in the coming months, but the story is still positive overall. Consumer and government spending, and investment will all grow by at least 2 per cent this year. Exports will grow by more than 4 per cent.

Consumer price index inflation is likely to fall below the 3-per cent threshold in the first quarter this year under this scenario, though it remains close to that level for the first half of the year. Job growth slows because current levels of job formation are not sustainable, given demographics and labour force participation.

The unemployment rate peaks at 3.9 per cent in 2024 in the baseline scenario, before gradually declining, thanks to persistently tight labour markets. Major investments prompted by the Inflation Reduction Act provide a boost to manufacturing at home.  Abroad, current geopolitical risks simmer but do not explode into larger regional conflicts.

Despite an expected slowdown in the coming quarters, the US economy is expected to post real growth of 2.4 per cent this year and 1.4 per cent in 2025 under the baseline scenario.

In the second scenario of escalation of geopolitical conflicts (20 per cent), there is heightened risk that the United States could be brought into a significant conflict before the end of the decade, Deloitte feels.

Geopolitical tensions increase as wars in Europe and the Middle East escalate, resulting in disruptions to trade and economic activity in the second half of this year. In this second scenario, eurozone gross domestic product (GDP) is projected to be flat this year and may decline by 0.3 per cent in the next. This, in turn, impacts the US trade balance as fewer American exports flow to one of its major customers.

The escalating conflicts also lead to a significant increase in the price of oil. As a net oil exporter, the United States stands to benefit in some ways from oil price increases. But the magnitude of the increase has a knock-on effect on firms and households, and it helps to hold inflation higher for longer, noted Deloitte.

In this scenario, from 2024 till 2028, US GDP will increase by an average of 1.6 per cent per year, 0.2 percentage points slower than in the baseline forecast but still above the long-term potential—albeit barely, it said.

The third scenario is a golden era for labour markets (10 per cent), in which there is always the possibility of fast technological changes that help significantly boost productivity. In this scenario, the average annual growth of labour productivity grows at an average annual rate of 1.9 per cent per year from 2024 through 2028, compared to 1.6 per cent in the baseline.

In the third scenario, GDP will rise faster than the baseline forecast over the entire forecast horizon. From 2024 through 2028, GDP is expected to rise at an average annual rate of 2.4 per cent per year, 0.6 percentage points higher than the baseline forecast.

This scenario also results in higher long-term potential for the economy at 2.3 per cent, compared to 1.5 per cent in the baseline.

Real consumer spending has consistently exceeded expectations. The current pace of growth is buoyed by households adding new debt and spending the savings they built up during the pandemic.

That means this pace of spending is not sustainable in the long run: Eventually, households will run out of excess savings and/or reach a ceiling on their ability to borrow. The precise timing of when that will happen—or whether that point has already come—is not a straightforward question to answer, Deloitte notes.

In Deloitte’s baseline forecast, Red Sea disruptions will not get worse, but will not get better either. Likewise, Panama Canal restrictions will remain at current levels and will not tighten further.

The combined effects of these restrictions will put upward pressure on prices and prevent inflation from falling as quickly as it otherwise could this year, Deloitte adds.

Fibre2Fashion News Desk (DS)