US GDP growth expected to weaken in 2024 due to Federal Reserve rate cuts

From Morningstar: 2024-07-12 06:05:00

The US GDP growth is expected to weaken before reaccelerating due to Federal Reserve rate cuts. The growth will be slower than normal but still positive, preventing a recession and helping inflation return to the Fed’s 2% target.

Despite facing rate hikes, US real GDP growth accelerated in 2023. The effects of the rate hikes are yet to fully play out, leading to a projected slowdown in growth for 2024 and 2025. Growth is expected to trough in 2025 before rebounding in 2026-28 without causing inflation.

GDP growth was strong in the second half of 2023 but slowed to 1.4% in the first quarter of 2024. Excluding volatile categories, growth was solid at 2.4%, driven by consumption and private fixed investment. The Atlanta Fed’s GDPNow projects 2.0% growth for the second quarter of 2024.

Factors like tight monetary policy, slowed government spending, and reduced household savings are expected to contribute to slower GDP growth in 2024. Although the economy rebounded in the first quarter of 2024, a genuine slowdown is anticipated for the rest of the year and early 2025.

The depletion of household savings is a key factor that could drag on consumption growth in the next year. As excess savings from the pandemic era diminish, saving rates are expected to rise, impacting economic growth. Aggressive Fed rate cuts could lead to a rebound in the economy from 2025 onwards.

Despite near-term bearish views, a bullish long-term GDP forecast is for 2024-28, with expectations of more growth than consensus estimates. Labor supply and productivity are key drivers of this outlook, as a recovery in labor force participation and solid productivity growth are anticipated.

The article was written by Yuyang Zhang and Emelia Fredlick.



Read more at Morningstar: We Expect US GDP Growth to Weaken Until Fed Cuts Rates