US economic growth likely accelerated in Q1, domestic demand to continue driving growth in 2016

In spite of heightened financial market volatility and weaker global prospects during the start of the year, the US economic growth is likely to have accelerated in the first quarter of 2016 after decelerating to 1% in Q4 2015. The economy is expected to be driven by resilient domestic demand in 2016, more than countering weak net exports resulting from heightened global economic uncertainties and the strong USD. Lower energy prices and employment growth are likely to support private consumption.

In the initial two months of 2016, nonfarm payrolls continued to grow at a strong pace, while the jobless rate declined to a seven-year low of 4.9%. That said, the recent retail sales data indicates a cautious beginning to 2016. Towards the end of 2015, fixed investment was weak, partly reflecting the effect of lower oil prices on the energy sector. However, favorable financing conditions and strong domestic demand should support fixed investment in 2016.

“Latest indicators suggest that the US economy looks likely to expand by 2.0-2.5% (annualised) in Q1. For the year as a whole, we expect growth of 2.4%, the same as in 2015, though risks include the global outlook and financial market developments, as well as potential uncertainties relating to the US Presidential election”, says Lloyd Bank.

Meanwhile, Fed Vice Chair Fischer has noted recently the ‘first stirrings’ of a rise in inflation. In February, CPI inflation declined back to 1% from 1.4% in January. However, core measures, excluding food and energy, rose to 2.3%, the highest level since May 2012. The personal consumption expenditure (PCE) deflator, which is the Fed’s preferred gauge of inflation, rose 1.3% in January, while the core measure rose 1.7%, moving slightly closer towards the target rate of 2%.

However, consumer price inflation might be continued to be weighed on by past rises in dollar and energy prices in the near term. In the medium term, underlying inflationary pressures are likely to pick up slowly with average hourly earnings growth expanding only  moderately, in spite of tightening labor market.