Near-term shocks won’t knock economy off course

Although the Boeing shutdown and the coronavirus outbreak pose downside risks to the economy in the first quarter, there are mounting signs that underlying momentum in the economy is strengthening. We estimate the halt in 737 Max production could reduce first-quarter GDP by as much as 0.5% annualised, while the disruption to supply chains from the coronavirus could knock off another few tenths of a percent. Both could yet force us to revise down our forecast that first-quarter GDP growth will be close to 2.0% annualised. Even though they will hit simultaneously, however, those shocks simply aren’t large enough to knock the economy off course. With the boost from lower interest rates set to spread from residential investment to business investment and payroll employment growth rebounding, we expect economic growth to re-accelerate back above its 2% potential pace in the second half of the year.