Analysis: UBS economists highlight importance of fiscal policy in supporting GDP growth

From Investing.com: 2024-05-25 04:01:02

UBS economists released an updated outlook on US fiscal policy until 2026, detailing implications for economic growth. Deficit projections were revised, with insights on Social Security solvency concerns and GDP impact. Without fiscal interventions, GDP growth would have been lower, at 2.0%. Immigration trends boosted potential GDP growth to 2.5% in 2023.

UBS economists highlighted the importance of fiscal policy in supporting GDP growth, estimating its contribution to be 1.1 percentage points in 2023. Without such measures, growth would have been significantly lower, impacting employment and potentially raising the unemployment rate. The alignment of output and labor market growth indicates reliance on fiscal support for economic stability.

Fed Chair Jerome Powell’s discussions on the neutral rate of interest, or r-star, were referenced in UBS’s analysis. Monetary policy rules suggest that the policy rate should adjust in line with r-star, which could imply a 100 basis point lowering of the funds rate. Fiscal support fading could lead to rates appearing more restrictive, potentially impacting economic growth.

UBS economists warned that reducing growth by over a percentage point could weaken the economy, leading to slower employment growth and increased slack in labor markets. Aligning output and hours worked signified labor market health, but reduced fiscal support may introduce disinflationary pressure, affecting inflation rates. Rates may seem more restrictive as fiscal support diminishes.



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