Four months after the CBO surprised US economy watchers by releasing an especially strong outlook for 2018 US GDP, which it said would hit 3.3%, on Monday afternoon in its latest projections, the CBO unexpectedly trimmed its 2018 real GDP forecast to 3.1% citing concerns over rising trade war coupled with higher inflation. The Congressional Budget Office kept its 2019 GDP growth forecast unchanged at 2.4%, and also trimmed its 2020 outlook to 1.7% from 1.8% in April.
While the 2018 cut will come as a disappointment to the Trump administration, it was still 0.6% points faster than the pace of its growth in 2017. The pickup in growth is largely the result of increases in government spending, reductions in taxes, and faster growth in private investment it said.
The catalyst for the cut is the risk of escalating trade war: the CBO admits that “higher tariffs on more imported products could add to inflationary pressure, which in turn would not only reduce the purchasing power of domestic income but also increase the costs of domestic production”.
A sizable uncertainty in the U.S. trade and inflation forecast stems from recent changes to U.S. import tariffs and the retaliation of the country’s key trading partners. The renegotiation of the North American Free Trade Agreement (NAFTA) similarly presents the risk that trade and inflation may differ from CBO’s projections.
Meanwhile, “retaliatory tariffs on U.S. exports are likely to reduce the profitability of U.S. businesses whose products are targeted by those tariffs”.
The CBO also echoed the Fed’s recent warnings noting that the “heightened uncertainty about trade policy could discourage businesses from making capital investments that they might otherwise have made.”
It also cautioned that “recent volatility in equity markets might indicate that such uncertainty is already taking a toll on the value of U.S. businesses.”
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