Poll: U.S. economic outlook static but uncertainty surges after vote

November 17, 2016 3:27 PM EST

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By Sumanta Dey and Anu Bararia

(Reuters) - U.S. economic forecasts haven't changed much since Donald Trump's shock win in the U.S. presidential election, but uncertainty has jumped amid a lack of clarity on possible aggressive tax cuts and trade barriers in the coming years.

Still, a Reuters poll of over 100 economists showed the Federal Reserve on course to raising interest rates next month, out of step with its global peers, after being thrown off track several times since its initial hike nearly a year ago.

The dollar <.DXY> hit a 13-1/2 year high this week against a basket of other currencies, up almost 3 percent since Trump's victory in the Nov. 8 election, a move that might hurt exporters by making their goods less competitive in overseas markets.

"Fiscal stimulus and tax cuts could boost domestic growth and generate significant inflation pressures," noted economists at ING Financial Markets, among the more optimistic forecasters on growth in the latest poll.

"(But) an aggressively protectionist Trump could spell a global trade war, with very damaging consequences for growth," they added.

About two-thirds of respondents said Trump's presidency will have a negative impact on U.S. exports next year. Ten said it wouldn't have much effect while only three said it would be a boost.

A lot will depend on the extent to which Trump follows through with his election promises on trade protectionism and curbing migration.

The likelihood of a recession in the coming year was pegged at 20 percent in this month's poll, up from 15 percent last month. It has been in that range over the past six months.

GROWTH FORECASTS UNMOVED

While all but one of the 52 economists expect higher or significantly higher government spending in the coming fiscal year, growth forecasts for next year didn't budge much.

An equal number of economists, about 20 percent each of the sample, upgraded and downgraded their forecasts, leaving the overall conclusions mostly unmoved.

In the current quarter, the U.S. economy is likely to expand at an annualized rate of 2.2 percent, down from the reported 2.9 percent in July-September. In the first three months of next year, growth is forecast to slow further to 2.0 percent.

It is then expected to flatline at an annualized rate of 2.2 percent in each quarter until year-end, only one-tenth of a percentage point higher than what was forecast in October.

The range of forecasts in the latest poll have widened considerably for the second half of next year, driven by much lower lows and a generally steady top end.

STEADY INFLATION AT BEST

Over 90 percent of respondents in the Reuters survey forecast the Fed would hike interest rates by 25 basis points at its December 13-14 policy meeting. Financial markets are pricing in a 90 percent probability of a move.

Two more similar rate increases are probably in store in the second and fourth quarter of next year, taking the federal funds target rate to a range of 1.00-1.25 by December 2017, unchanged from expectations in last month's poll.

But much will depend on the new fiscal outlook.

"There is a lot of uncertainty associated with fiscal policy, whether it is on taxation or on trade regulation," said Emanuella Enenajor, North America economist at BofAML.

"But we still think the Fed is going to hike in December, and obviously how financial conditions evolve will be critical for that," Enenajor added.

With the U.S. economy close to full employment and the jobless rate at 4.9 percent in October, any extra government spending is likely to boost overall demand and fuel inflation.

The 10-year Treasury yield is already up about 20 percent since Trump's victory on bets the upcoming fiscal stimulus would help stoke inflation and lead to more rate hikes.

U.S. consumer prices rose 1.6 percent in the twelve months to October, data showed on Thursday, up slightly from 1.5 percent in September.

But the core PCE price index, the Fed's preferred inflation gauge and the key impediment to higher rates throughout the year, is unlikely to hit the Fed's 2 percent goal until at least the end of next year, the poll found.

(Polling and analysis by Sarmista Sen and Vartika Sahu; Editing by Ross Finley and Bernadette Baum)



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