The apparent slowdown in economic growth in the first quarter, to between 2.0% and 2.5% annualised, is likely to be reversed as the boost from the recent fiscal stimulus outweighs any hit from escalating trade tensions. Admittedly, the recent survey evidence has been mixed, consistent with GDP growth of anywhere between 1.5% and 4.5% annualised. But the tax cuts have already boosted real disposable incomes. With consumer confidence close to a decade-high, we think it will only be a matter of time before that shows up in stronger household spending. Tariffs and counter-tariffs on up to $150bn of trade with China will most likely be scaled back, but even if they aren’t, they would have only a small impact on GDP growth. With the near-term economic outlook still solid, Fed officials will be more focused on the rebound in inflation, which we think will prompt them to raise rates a further three times this year.
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