2010 GDP Growth Expectations: Advantage United States

November 9, 2009

The new November Economist survey of forecasters shows an upwardly revised U.S. GDP growth projection of 2.6% for 2010, which is substantially higher than forecasts of 1.5% in the case of Japan, 1.3% for Great Britain and 1.2% in the euro area.  This perceived advantage is not a new phenomenon.  Eight months ago in the March Economist survey, the first to include 2010 forecasts, the consensus of participants saw growth of 1.9% in the United States, 0.7% in Euroland, and 0.5% in Britain and Japan.  Chronic dollar weakness is one factor behind this bias favoring U.S. prospects.

Despite significant across-the-board upward revisions since last spring in projected growth, forecasts of CPI inflation have stayed pretty constant.  The U.S. forecast of 1.6% is a tenth higher than it was in March.  That for Euroland is 0.2 percentage points lower at 1.1%.  Britain’s (1.9%) is two-tenths higher, and Japan’s (minus 0.9% versus a prediction of minus 0.2% back in March) is the only forecast in this group of nations to have changed in a meaningful way.  In the other three regions, these price forecasts underscore the validity of claims that medium-term price expectations remain well-anchored. 

A front-page story in today’s Financial Times suggests just the opposite.  The piece entitled “Markets’ inflation readings edge upward” cites inflation-adjusted fixed-income securities like TIPs to back up its claim.  The case for continuing price stability rests on the current excess of unused productive capital and labor resources and the likelihood of sub-trend economic growth in coming years.  The case for accelerating inflation rests on the ultra-loose fiscal and monetary policies that most nations continue to pursue.  A 24.8% per annum increase in gold prices from two years ago is being interpreted by some as further evidence of untethered price expectations.

I’m influenced by the experience of Japan and am predisposed to thinking that fears of future inflation will in time be proved overblown.  I prefer to associate strong gold demand with mounting concern that the dollar could lose its role as the dominant currency in reserve asset portfolios.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.


Comments are closed.