United States Business Forecast Report Q4 2011

Core Views
Following disappointing economic data in the first half of 2011, we expect a modest acceleration of growth in the second half of the year. But we reiterate our core view that the recovery is set to be erratic and weak on the whole, as households continue to deleverage.
The US consumer will continue to be constrained by a weak labour market, with the additional element of high commodity prices reducing
consumers’ disposable income. Fiscal policy is set to tighten toward the end of 2011 and going into 2012, though this will continue to be offset by loose monetary policy, with no Federal Reserve interest rate hikes forecast until late 2012. We maintain our view that the end of the ‘QE2’ quantitative easing policy in June 2011 will not have a major negative effect on growth.
The US dollar will continue to weaken over the course of 2011, especially against higher-yielding emerging market currencies.
Major Forecast Changes
We have downgraded our 2011 US real GDP growth forecast to 2.6% from 2.9% previously, due primarily to the weak data in the first half of the year. We have bumped up our growth forecast slightly for 2012 to 3.0% from 2.9%. High oil prices have convinced us to raise our average inflation forecast, as measured by the consumer price index, to 3.0% for 2011, from 2.8% previously. However, core inflation rates that strip out volatile items such as food and energy should remain low.
We have revised down our Fed funds interest rate forecast for end-2012 to 1.0% from 2.0%. The primary risk to this projection is that monetary tightening waits until even later, as high unemployment and low inflation should keep the Fed on the sidelines for the foreseeable future.
Key Risks To Outlook
Downside Risks To Growth Forecast: A spike in oil prices would weigh on business sentiment and reduce consumers’ disposable income, putting downside pressure on investment and consumption.
A major policy error, especially on the fiscal side, could push the US into recession.
Downside Risks To Long-Term Outlook: The gaping fiscal deficit and rising government debt burden are not an immediate concern, but do pose a risk to macroeconomic stability over a longer horizon.
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Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks To Outlook5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Fiscal Impasse Sets The Stage For 2012
Though we expect an eventual resolution to the seemingly intractable debate between Republicans and Democrats over the federal debt limit, we’ll most likely see a major national economic debate ahead of elections in November 2012
Foreign Policy 9
Politics Over Policy: Hefty US Withdrawal A Risk To Progress
Under mounting domestic political pressure, President Barack Obama announced a sizeable withdrawal of approximately 33,000 US troops from their military deployment in Afghanistan by the summer of 2012
TABLE: POLITICAL OVERVIEW 9
Long-Term Political Outlook 11
Tough Challenges In The 2010s
The 2010s look set to be another challenging decade for the US, mainly due to the aftermath of the 2007-2009 recession and the ongoing war in Afghanistan
Chapter 2: Economic Outlook 15
SWOT Analysis 15
BMI Economic Risk Ratings 15
Economic Activity 16
TABLE: GDP BY EXPENDITURE 17
TABLE: ECONOMIC ACTIVITY 18
Fiscal Policy 18
There Are Ways Out Of The Fiscal Mess
Significant compromise on both the revenue and expenditure sides will be required to narrow the federal fiscal gap, but there seems to be little genuine political will to make anything happen
TABLE: FISCAL POLICY 20
Monetary Policy 21
End Of QE2 Is Not The End Of The World
Despite the ending of the Federal Reserve’s second round of quantitative easing (‘QE2’), we believe that there will be few ill effects, and that monetary policy will remain very loose for several quarters to come
TABLE: MONETARY POLICY 22
Chapter 3: 10-Year Forecast 25
The US Economy To 2020 25
Economy Down But Not Out Over The Long Run
The US economy’s pace of growth is set to slow over the next 10 years to a long-term rate of 23-24% as deleveraging from a massive credit binge takes its toll
TABLE: Long-Term Macroeconomic Forecasts 25
Chapter 4: Business Environment 27
SWOT Analysis 27
BMI Business Environment Risk Ratings 27
Table: BMI Business And Operation Risk Ratings 28
Table: BMI Legal Framework Rating 29
Business Environment Outlook 28
Institutions 28
Infrastructure 29
Table: Labour Force Quality 30
Market Orientation 31
Table: Trade And Investment Ratings 31
Operational Risk 32
TABLE: TOP EXPORT DESTINATIONS, US $mn 32
Chapter 5: Key Sectors 33
Telecommunications 33
Table: Telecoms Sector – Internet – Historical Data & Forecasts 35
Other Key Sectors 36
Table: Infrastructure Sector Key Indicators 36
Table: Food & Drink Sector Key Indicators 37
Table: Oil & Gas Sector Key Indicators 37
Table: Pharma Sector Key Indicators 37
Table: Defence & Security Sector Key Indicators 37
Table: Autos Sector Key Indicators 38
Table: Freight transport key indicators 38
Chapter 6: BMI Global Assumptions 39
Global Outlook 39
Second Half Risks
TABLE: GLOBAL ASSUMPTIONS 39
Table: EMERGING MARKETS AGGREGATE GROWTH 40
Table: DEVELOPED STATES REAL GDP GROWTH FORECAST 41
Table: REAL GDP GROWTH CONSENSUS FORECASTS 41
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