U.S. Outlook: Financial volatility takes center stage
The economic and financial drama unfolding in Greece and China is dominating the headlines and has relegated the discussion of Fed liftoff to the back pages of the newspaper. While we don’t dismiss the downside economic risks to China and the Eurozone economies from what has occurred, especially if financial conditions continue to worsen, we do think, however, it is important to keep things in perspective when financial volatility runs amok and irrational panic sets in.
First, we are holding our fire on baseline GDP growth downgrades in both China and the Eurozone until we see more evidence of economic damage. We have not yet altered our GDP growth forecasts for either China or Europe for 2015. Our forecast for Chinese GDP growth this year is 6.8%, a bit below the economic consensus and official targets of 7.0% growth this year.
Our growth outlook for the Eurozone remains at 1.5% for 2015. Despite the damning headlines out of Greece, recent economic indicators from the Eurozone suggest economic activity actually improved in the second quarter. In fact, the Eurozone composite PMI index hit an expansion high in June. This should give Europe a little bit of space to sort out Greece without materially damaging the overall European economy.
Most importantly for this audience, we do not expect a measurable negative impact on the U.S. economic outlook from the financial events that have occurred in Europe and China so far. I don’t suspect the Federal Reserve does is either, but it could get them to raise the caution flag again, keeping the first rate hike in the FOMC’s back pocket instead of on the table in September. Since we have not altered our forecast for the U.S. economy, we are sticking to our one and done September liftoff forecast for the FOMC, but admit the probably the Fed could hold off until December is close to 50/50 at this point.
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Tags: economy