Animal Spirits and Tax Cuts to Spur Growth

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We expect the US economy to expand by 3.2% in 2018, and by 2.9% in 2019. Underpinning this above-concensus forecast is a belief that the US stimulus provided by US tax reform will add around ¾ of a percentage point to growth this year and that the recently-announced increase in government spending could add a similar amount to GDP growth. Animal spirit have been unleashed, a point reflected by our Economic Sentiment Indıcator (ESI) which climbed to a 14-year high in February.

It remains to be seen whether the windfall that US corporates obtain from the tax cuts will be shared with workers, but to the extent that the tax cuts boost nominal GDP, wage growth is likely to follow süit. With inflation rising quicker than many people expect, we believe that the Fed will raise interes rates by 25 basis point on four occasions this year and another four times in 2019. In real terms, though, this is likely to remain the most gradual tightening cycle in the last 50 years.

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