US economy likely to slow to 1.4 pct next year; sluggish global activity to weigh on core inflation

In the US, financial conditions continue to be in a state of flux, with a decline in yields giving significant cushion as investors have reacted to Brexit by marking down projections for federal funds rates’ future trajectory, noted Morgan Stanley in a research report. Under such a scenario, possible changes in the economic outlook might alter to a wide range of uncertainty. An increasing difficult global scenario is countered by additional accommodative stance on policy.

“We forecast headline GDP growth of 1.6 percent 4Q/4Q this year (1.7 percent Y), slowing to 1.4 percent 4Q/4Q next year (1.5 percent Y)”, added Morgan Stanley.

All indications direct towards US business growth moving into late phase of the cycle. It is marked by slowdown in job growth, a turn in credit and earnings under pressure, according to Morgan Stanley. Risks to the outlook are tilted on the downside with a higher likelihood of recession in the next 12 months.

Meanwhile, jobless rate is likely to reach 4.8 percent by the end of 2016 and is expected to remain stable at that level throughout 2017. A low jobless rate would keep wage growth on a positive track, underpinning personal income as job growth decelerates from its average of 172,000 in the first half of 2016 to expected 56,000 by the second half of 2017, said Morgan Stanley.

Households’ financial expectations are expected to be under pressure, while personal savings rate would be high due to election uncertainty, slower income growth and financial market volatility.

In the mean time, weak global activity and oversupply continue to be the drags on measures of core inflation, whereas the upside in rental price growth is limited by the additional supply in multi-family market. Core PCE growth on a year-on-year basis is likely to remain sticky, fluctuating between 1.6 percent and 1.7 percent in the forecast horizon, according to Morgan Stanley.