US government shutdown to crimp growth, recession risk steady: Reuters poll

U.S. economic growth will take a hit this quarter from the longest-ever government shutdown, keeping the Federal Reserve on the sidelines until at least its April 30-May 1 meeting, a Reuters poll of economists showed.

But the probability of a U.S. recession in the next 12 months held steady from last month at 20 percent, according to the median forecast, while the chance of a recession in the next two years was also steady at a median 40 percent.

The latest Reuters poll of over 100 economists taken Jan 16-23 also showed a cut to the 2019 quarterly growth outlook, in line with a recent run of weaker U.S. economic data pointing to rougher sledding for the economy this year than last year.

“With the economy possibly easing and inflation not stirring in a meaningful way, the case for additional tightening in monetary policy seems weak,” noted Michael Moran, chief economist at Daiwa Capital Markets.

The partial government shutdown affecting 800,000 federal workers has lasted more than a month and is expected to hurt the already-slowing economy. The Senate is preparing for a vote on Thursday to fund the government for three weeks.

Nearly 60 percent of about 50 economists who answered an additional question said the shutdown will have a significant impact on first quarter gross domestic product growth.

When asked how much of an impact the shutdown would have on U.S. GDP for this quarter, the median was for a 0.3 percentage point trim. But forecasts ranged between 0.1 and 1.3 percentage points.

Analysts expected the U.S. economy to grow at a 2.1 percent annualized pace this quarter, down from 2.3 percent forecast last month, followed by 2.3 percent in the second quarter and then slowing to 1.9 percent by the end of the year.

Growth forecasts were trimmed for each quarter this year.

“If the shutdown were to last for the entire quarter, it could subtract around a full percentage point from Q1 inflation-adjusted output growth. In a worst-case scenario, real GDP could indeed contract in Q1 if this Congressional impasse remains unresolved,” said Brett Ryan, senior U.S. economist at Deutsche Bank.

“However, we have not made any changes to our current-quarter real GDP growth forecast...given the uncertainty around these estimates.”

A deep sell-off in financial markets last month drove several U.S. stock indexes closer to bear market territory, and pushed expectations for the Fed to slow the pace of its rate hikes. Fed officials have also voiced growing concerns about the economy. Last week, New York Fed President John Williams called for “prudence, patience and good judgment” among policy makers.

The latest survey still predicted two rate hikes in 2019, in line with the December poll and the Fed’s own dot-plots. However, economists now expect the Fed to take rates higher in the second quarter instead of the first quarter, as predicted in the previous poll.

But nearly one-third of 105 economists predicted the U.S. central bank would either hike rates only once or keep the fed funds rate unchanged at 2.25-2.50 percent in 2019. That was notably higher than the 11 of 101 respondents in the previous poll.

Traders of U.S. short-term interest-rate futures expect no rate hikes in 2019.

“We agree that the environment has shifted from that in December when the Fed issued its latest dot plot and hinted at two additional tightenings,” noted Daiwa’s Moran. “We have less confidence in our projection of two hikes, but we will hold to that view at this time.”

The core PCE price index, the Fed’s preferred inflation measure, was expected to reach the Fed’s target of 2 percent in the third quarter and then forecast to level out to average slightly above that at 2.1 percent in the final quarter.

It was 1.9 percent in November.

Over 80 percent of 52 economists who answered a separate question said a sell-off in financial markets and a sharper slowdown in the U.S. economy pose the biggest challenges for the Fed in raising rates this year.

“Global weakness, tightening financial conditions, and quiescent inflation should lead the FOMC to pause their hiking cycle this year. The timing of rate increases will depend crucially on incoming data, but for now we expect the Fed to at least skip a Q1 hike,” noted James Sweeney, chief economist at Credit Suisse.

Polling by Sujith Pai and Manjul Paul; Analysis by Sujith Pai, Nagamani Lingappa and Mumal Rathore; Editing by Ross Finley and David Gregorio