Country Report United States June 2009

Outlook for 2009-10

• The Democrats are likely to retain their hold on both houses of Congress in the mid-term election in November 2010, although they may lose some support. The Republicans are too weak to be a serious challenge.
• Apart from the focus on stabilising the financial sector, the president, Barack Obama, will concentrate on implementing a healthcare reform. Major progress in extending coverage to those currently uninsured seems likely.
• A new fiscal stimulus package, approved in February this year, will drastically increase the federal deficit. Concerns about the fiscal position will increasingly dominate the policy discussion.
• The Economist Intelligence Unit expects the Federal Reserve (Fed, the central bank) to keep its policy rate target at just above 0% for 2009 and 2010. Unorthodox monetary policy measures will start to be phased out next year.
• Real GDP is forecast to contract by 2.9% in 2009 as the financial crisis and the housing downturn take their toll on domestic demand. Slowing growth in the developed world will also curb US export growth in 2009.
• Average consumer price inflation is set to turn negative in 2009 as a result of declining commodity prices. Inflation should turn positive again in 2010, but will remain low owing to the severe weakness of domestic demand.
• The current-account position will improve sharply. We expect the current-account deficit to fall to less than 3% of GDP in 2009 partly owing to lower commodity prices.

Monthly review

• As a result of the defection of Arlen Specter, a Republican senator, to the Democrats, Mr Obama's party needs only one more Senate seat to get a filibuster-proof majority. With one Senate seat still open, this is within reach.
• With several recent initiatives, including a shift in antitrust policy, Mr Obama's administration has made clear that the interests of big businesses are much less protected than under the previous administration.
• Preparations for a healthcare reform bill are running high. Given the dramatic deterioration of the fiscal position, the goal of cutting healthcare costs has become more important than the target of increasing insurance coverage.
• First-quarter GDP fell by 5.7% in annualised terms. There are increasing signs that the pace of contraction in GDP is slowing and a stabilisation might be coming soon, but the recovery will be weak.
• Financial markets have stabilised to some extent, but funding conditions will remain very weak and fiscal concerns could lead to new instability.