Country Report United States July 2008

Outlook for 2008-09

• Barack Obama, the presumptive Democratic presidential candidate, will win the November presidential election. The party will also fare well in the November congressional election, boosting its majorities in both houses.
• The Fed will stay its hand for fear that further rate cuts could stoke a surge in inflation expectations. It is likely to turn to interest-rate hiking mood in the second half of 2009 if macroeconomic conditions start to improve.
• Real GDP is forecast to rise by 1.2% this year (an upward revision from 0.9% previously, reflecting upward revisions to first-quarter GDP growth results) and by 1.1% in 2009.
• Private consumption will be depressed by declining house values, higher mortgage payments, higher prices for fuel and a weakening labour market.
• The severe weakness of domestic demand should help to contain inflationary pressures, but the rapid pick-up in upstream prices this year suggests that inflationary pressures may take longer to ease than we assume.

Monthly review

• Mr Obama has, in effect, won the Democratic nomination, as his last challenger, Hillary Clinton, gave up after the last primary votes on evidence that Mr Obama had secured sufficient votes to win the nomination.
• With his attention now on the presidential election itself, Mr Obama is refocusing some of his positions to appeal more to centrist voters, but risking thereby losing some of the enthusiastic backing from those close to the party.
• The Republican opponent, John McCain, meanwhile is retreating from some long-held centrist positions in order to become more attractive to Republican core voters.
• The surge in oil prices and the resulting inflation hike has put an end to interest rate cuts, although the difficult macroeconomic situation also means that rate hikes remain unlikely.
• Recent economic data supported the impression that the economy was weak but not necessarily already in recession. However, strong retail sales figures in May were clearly boosted by the economic stimulus package tax rebates.
• Inflation has emerged as a major concern, in spite of the slowing economy. The consumer price index jumped by 0.6% in May, bringing its rise over the previous 12 months to a worrying 4.2%.
• Several key sectors have been clearly hit by the downturn. Apart from the financial sector, the construction industry continues to plummet. Vehicle manufacturers have also come under pressure, as has the air transport sector.

Source: Country Report