US Economic Outlook - 07 February 2020

Economic growth in the US slowed to a still-above-trend 2.3% in 2019, following a fiscal-boosted 2.9% outturn in the prior year. The outlook for 2020 calls for further deceleration, to 1.6%. While trade tensions between the US and China have receded, disputes with Europe may be on the rise, due to the long-standing Boeing-Airbus row as well as possible upcoming digital taxes in a number European of countries. Earlier in January, hostilities also flared with Iran. Though the latter escalation has currently waned, the issues are far from resolved.

For now, trade and geopolitical uncertainty has been replaced with the uncertainty emanating from the spread of the coronavirus originating in Wuhan, China. Assuming a peak in the epidemic by the end of this month or early March, we do not at this time expect a significant impact on full year US growth in the baseline, though the quarterly profile will be one of 1Q20 weakness followed by a 2Q/3Q rebound. However, the virus is expected to have a sizeable negative impact on Chinese growth. The resultant global reverberations may turn out to be bigger than expected, as China is now a larger share of the global economy than in 2003 during the SARS epidemic, and therefore historical-based estimations of impact elsewhere may no longer hold. Furthermore, the coronavirus epidemic itself may be more prolonged or severe than projected at this time, implying that risks to the baseline outlook are geared to the downside.

Key takeaways:

  • Growth in 2019 remained above trend despite a deceleration to 2.3%; we expect further slowing this year.
  • Trade tensions with China have eased for now, while disputes with Europe may be on the rise.
  • The spreading coronavirus is adding further downside risk and uncertainty to the outlook.
  • In the baseline, we expect the Federal Reserve to remain on hold this year, and for long bond yields to move roughly sideways.
  • Given lesser downside risks, we now expect the Fed to be on hold this year and have also revised up our expectation for long bond yields.


Economic Outlook US Economic Outlook - 07 February 2020