Country Report United States October 2008

Outlook for 2009-10

• Barack Obama, the Democratic Party candidate, is expected to win the presidential election on November 4th, although his lead in opinion polls has declined. The Democrats will also strengthen their grip on Congress.
• We expect the Federal Reserve to cut its policy interest rate two times by 25 basis points each to 1.5% before the end of the year, and to continue to expand extraordinary measures to provide liquidity to markets.
• The government seems set to create a fund to acquire distressed assets from failing financial services institutions.
• Real GDP growth will slow sharply in 2009, as the ongoing housing market adjustment and the credit famine 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 ease in 2009 and 2010 from its recent highs. The severe weakness of domestic demand and easing commodity prices will exert strong downward pressure on US prices.
• We expect the dollar to strengthen moderately from its current levels during 2009 and 2010. The current-account deficit will narrow to 2.3% of GDP in 2009, driven largely by a narrowing of the merchandise trade deficit.

Monthly review

• Mr Obama's lead over his Republican opponent, John McCain, has evaporated in recent weeks, not least because of the furore of Sarah Palin's nomination as Mr McCain's running-mate, although the effect will fade.
• In a sharp deterioration of the financial crisis, the government has bailed out Fannie Mae and Freddie Mac, the mortgage corporations, and AIG, an insurance company.
• Lehman Brothers, an investment bank, has been allowed to go bankrupt and Merrill Lynch, another investment bank, has been forced to accept a takeover by Bank of America. Despite substantive measures, further pain seems likely.
• The Fed seems to have shifted to a cautious easing bias in response to events, but has not cut its interest rates.
• According to new estimates, the federal government deficit is set to deteriorate substantially. The financial crisis will be one of the factors weighing on public finances.
• After a strong second quarter, economic indicators have generally been weak. This, together with worsening financial conditions, has raised the possibility that the current downturn will be classified as a recession.

Source: Country Report