Goldman Sachs is relatively optimistic about growth in 2017, for three reasons: first, despite the lack of spare capacity, US recession risk remains below the historical average; second, financial conditions should remain a growth tailwind – at least in the first half of 2017; and third, we expect a fiscal easing accumulating to 1% of GDP by 2018. However, uncertainty remains and here is what Jan Hatzius and his team believe are the ten most important questions for 2017.
1. Will growth remain above trend?
Yes. Admittedly, the expansion is quite advanced. It has already lasted about 18 months longer than the median completed expansion since the mid-1800s. And while expansions do not die of old age, history shows that they are at greater risk when spare capacity is exhausted, as it probably is now. So it is especially important to monitor whether growth may be running out of steam.
Nevertheless, we are relatively optimistic about growth in 2017 and expect real GDP to climb at a 2.2% rate. First, despite the lack of spare capacity, US recession risk remains below the historical average, as shown in Exhibit 1. The most important recession predictors, at horizons longer than the next few quarters, are spare capacity and past credit growth. Spare capacity has dwindled, which has boosted the recession probability somewhat, but output is not yet meaningfully above potential. Moreover, debt growth has been very moderate in the economy as a whole, despite pockets in the corporate sector where the credit cycle is more advanced. This is also consistent with alternative measures of financial imbalances such as the private sector financial balance, which remains comfortably in surplus to the tune of 2% of GDP.
Exhibit 1: US Recession Risk Below Historical Average
This post was published at Zero Hedge on Dec 31, 2016.