Country Report United States September 2009

Outlook for 2009-10

• Despite some loss of support recently, the Democrats still look likely to retain their hold on both houses of Congress in the November 2010 mid-term election. The Republicans are currently too weak to present a serious challenge.
• A 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. We assume no second package.
• We expect the Federal Reserve (Fed, the central bank) to keep its policy rate target at just above 0% in 2009 and 2010. Unorthodox monetary policy measures will start to be phased out next year.
• Real GDP is forecast to contract by 2.4% in 2009 as the financial crisis and the housing downturn take their toll on domestic demand. Massive fiscal and monetary stimulus will lead to a recovery of growth to 1.8% in 2010.
• The likelihood of a W-shaped growth trajectory is high, as domestic demand is likely to remain weak and financial intermediation is impaired.
• 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 massive slack in the economy.
• The current-account position will improve sharply. We expect the current-account deficit to fall to around 3% of GDP in both 2009 and 2010, partly owing to lower commodity prices.

Monthly review

• The debate about the major reform of healthcare provision proposed by Barack Obama has become acrimonious, lowering support for the president.
• The administration has devoted attention to its policy on Africa.
• The term of the Fed chairman, Ben Bernanke, is set to be renewed despite some earlier speculation to the contrary. Market forecasts of early interest rate increases seem misguided, given the importance of stimulus for the recovery.
• The car-scrapping incentive programme has received an enthusiastic response from consumers, but expired in late August, raising risks of a sharp fallback in car demand in coming months.
• Recent economic indicators point to a possible end of the recession, with even housing markets showing some early signs of stabilisation.
• Financial concerns have increasingly shifted to commercial mortgages, which could turn bad and hit numerous small and medium-sized banks.