At the beginning of last week, BofA Merrill Lynch
slashed its GDP growth forecasts for Q3 and Q4 2013, citing the effects of the government shutdown on spending and attendant “significant spillovers into the private sector.”
Today, the bank’s economists also downgrade its GDP growth forecast for Q1 2014, following a temporary deal in Congress this week to reopen the government until January 15 and raise the debt ceiling until February 7.
“We have made a minor change in our GDP forecast: we continue to see just 2% 4Q GDP growth, but we have cut 1Q back from 3.3% to 2.8%,” writes Ethan Harris, BAML’s co-head of global economics research, in a note to clients. “This reflects offsetting factors: government spending will bounce back in 1Q, but with new budget deadlines we expect mild confidence headwinds to persist into the quarter. Our Fed call remains the same, with a $US10bn tapering in January and with a later move more likely than a sooner move.”
Harris expands on the call in the note:
Looking ahead, the broad story remains the same. Growth in the last several years has been held back by three factors: structural healing in the private sector, fiscal austerity and confidence shocks. Looking ahead, confidence remains at risk but the structural healing is well advanced and fiscal drag drops significantly. At the same time, we think inflation is likely to remain below the Fed’s forecast, with abundant spare capacity in the US and globally, soft commodity prices and a strong dollar. This implies a super-slow Fed exit. We don’t expect QE to end until next November and we don’t expect rate hikes until the end of 2015…
As we have noted before, the shutdown has made the economic and Fed outlook much more uncertain. Prior to the shutdown, the economy seemed to be still stuck at 2% growth, but with hope of stronger growth ahead. The shutdown caused both an austerity shock — cuts in government spending — and an uncertainty shock. The shutdown has hurt sentiment a lot, pushing many survey measures lower. Looking ahead, the issue now is does sentiment quickly go back to pre-crisis levels or does it linger lower? The latter is likely if people worry about a sequence of shutdowns. Hence we need to wait for post-crisis survey data to get a clear sense of the lasting damage. Given release lags, it will take even longer to judge the impact on hard data.
Harris thinks the crisis may be relatively less chaotic in the spring, though.
“While the debt ceiling deadline is nominally on February 7, the real deadline — the ‘x-date’ when cash runs out — is probably in May,” says Harris. “The Treasury can run for several months using extraordinary measures and revenues from the big tax season. Thus, unlike in the fall, the two deadlines don’t come right on top of each other.”