U.S. annual GDP seen rising to 2.6 pct this year, may slow in next: Danske Bank

The United States economy is still in good shape although GDP growth slowed slightly in Q1 2018. It is the first time since the investment downturn hit the economy that GDP growth has been above 2 percent annualised in four consecutive quarters, according to the latest research report from Danske Bank.

Confidence remains high among both consumers and businesses, so we expect decent domestic demand growth in coming years but probably at a slightly slower pace, as there are signs growth has peaked for now despite more expansionary fiscal policy.

Private consumption has grown quite steadily at around 2.5 percent in recent years, but slightly slower growth in the coming years is expected, as real wage growth has slowed due to higher inflation and still subdued nominal wage growth and employment growth is not as high as previously.

Fiscal policy has become more expansionary due to the combination of deficit-financed tax cuts and higher budget spending caps. From a Keynesian point of view, the US should tighten fiscal policy now, not expand it, as fiscal policy should be countercyclical, not pro-cyclical, the report added.

While non-residential investments have recovered after the investment recession in 2014-16 in the wake of the oil price collapse, there have been softness in recent months. It is probably linked to the peak seen in manufacturing PMIs globally, as the manufacturing sector is more investment heavy than the service sector.

"The Fed is expected to continue its hiking cycle and seems more or less on autopilot. It will be a close call whether the Fed hikes once or twice more this year, but after the Fed meeting in June, our base case is for two additional hikes in September and December," the bank commented.