“The Hope Trade” Is Over: BofA Slashes Its 2017 GDP Forecast To Just 2.1%

Friday, June 23, 2017
By Paul Martin

by Tyler Durden
ZeroHedge.com
Jun 23, 2017

First they came for the Trump Trade… then they came for the hope. And, as a result, BofA has thrown in the towel on its economic rebound for this year.

As BofA’s Michelle Meyer writes, “Hopes for a big fiscal stimulus have faded, prompting us to revise our 2018 GDP growth forecast to 2.1%, down from 2.5%. While growth will be slower, it is important to remember that the economy does not “need” stimulus to expand.” Unless it does of course, because as Citi showed recently, all central bank liquidity injections are fungible, and prop up not only stocks but also economies.

In any case, here is BofA’s explanation why it, like the rest of Wall Street not to mention the Fed, were all wrong.

Revising 2018

Back in November when we released our Year Ahead piece, we argued that growth would be a trend-like 2% this year but would rise to 2.5% next year amid fiscal stimulus. We feel generally comfortable with our forecast for this year but now believe growth will end up being slower next year. We are therefore revising our forecast to 2.1% for 2018, implying that the economy will continue to grow modestly above trend .

The hope trade

There are three main reasons for our downward revision to growth next year:

1.The prospects of tax reform have dimmed. While it is still possible that legislation is passed, it seems that it would be later and smaller than previously speculated.
2.Policy uncertainty is high and threatens to remain elevated into next year given tensions in Washington and controversies in the Trump administration. This has contributed to a “wait and see” mode among businesses and consumers.
3.The auto sector is shifting from a tailwind to a headwind next year. This means that auto output should go from adding a few tenths to annual GDP growth to slicing a tenth or two.

Keep in mind that our downward revision in growth next year simply returns our forecast to the post-recession average of 2.1%. The US does not need fiscal easing to enjoy slightly above-trend growth. There are plenty of reasons to feel confident that the expansion will persist into 2018 without stimulus. The labor market is still adding workers in excess of what is necessary to keep up with population growth. The housing recovery is slow but steady. Financial conditions are supportive with low rates, recent softening in the dollar and appreciating equity markets. Household balance sheets appear robust with strong gains in net worth and low leverage.

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