Country Report United States September 2008

Outlook for 2008-09

• Barack Obama, the Democratic Party candidate, will win the presidential election on November 4th. The race could, however, be close. The Democrats will also strengthen their grip on Congress.
• We expect the Fed to cut the fed funds rate by 25 basis points in the fourth quarter of 2008 and by another 25 basis points in the first quarter of 2009. This will take the policy rate down to a low of 1.5%.
• 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 from its recent highs. The severe weakness of domestic demand and easing commodity prices will exert strong downward pressure on US prices in 2009.
• We have revised our US dollar:euro forecast in the light of the dollar's recent strength. But concerns over the deterioration in the public finances and further financial sector volatility could make for a more volatile trajectory.
• We expect the current-account deficit to narrow to around 3% of GDP in 2009, down from a peak of 6% in 2006. This will be driven largely by a narrowing of the merchandise trade deficit.

Monthly review

• Opinion polls have shown a narrowing gap between Mr Obama and John McCain, his Republican rival. Both candidates have made astute choices for their running-mates for the vice-presidency.
• The conflict between Russia and Georgia has further raised tensions between the US and Russia, leading to concerns about a new cold war.
• A new housing package has received final approval. Despite official claims to the contrary, it is likely that a provision allowing a bail-out of government-sponsored mortgage corporations will have to be used.
• The bias for monetary policymakers has returned to being broadly neutral, mainly in response to lower crude oil prices.
• Second-quarter GDP was revised up sharply, but a rising divergence from data for real gross domestic income raises doubts about the reliability of the GDP figures, and the case for further economic weakness remains intact.
• The US dollar has staged a spirited recovery. It reached a six-month high against the euro of US$1.47 in late August, and a two-year peak against sterling of US$1.82.