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Bush, George W.

US Economy Faces Challenges in 2005 and 2006

Strategic Insights

— 2 min read

The second administration of George W. Bush is driving an ambitious domestic agenda, taking advantage of Republican majorities in the House and Senate, but contentious policies face strong resistance from Democrats and will test unity within the Republican ranks. With the Federal Reserve concerned about domestic asset bubbles and inflation risks, monetary policy will continue to tighten, affecting consumers and potentially slowing real GDP growth to 3.5% in 2005 and 2.9% in 2006. Imbalances in the economy could trigger a less benign scenario.

Key Takeaways:

  • The Bush administration is pursuing a conservative agenda in its second term, focusing on domestic policy, and aiming to cement Republican dominance at the federal level.
  • The Federal Reserve will maintain a neutral monetary policy stance, with interest rates rising to 4.25% by end-2005 and 5% by the end of 2006.
  • Despite a slowdown in global economic growth, the world economy will still expand at a good rate, but at a slower pace than in 2004, with world GDP growth slowing to 4.2% in 2005 and 4% in 2006.
  • Real GDP growth in the US is forecast to slow to 3.5% in 2005 and 2.9% in 2006, driven by the impact of monetary tightening on personal and corporate sectors.
  • Personal debt relative to income is high, making consumers vulnerable to rising interest rates, which will squeeze consumer spending, particularly in 2006.
  • The stabilisation of property prices will end the surge of household equity withdrawal that has helped to fund much of consumer spending in 2004-05.
  • Consumer price inflation is set to accelerate in the second half of 2005 before moderating in 2006, with average inflation expected to reach 3% in 2005 and 2.8% in 2006.
  • The rejection of the EU constitution has raised concerns about the long-term viability of the euro, leading to a broad weakening of the dollar in 2005.

Statistics:

  • US current-account deficit expected to reach $810bn (6.5% of GDP) in 2005 and $857bn (6.5% of GDP) in 2006.
  • Federal budget deficit expected to widen to 3.1% of GDP in 2005/06, with total net government debt expected to reach 46.7% of GDP.
  • Consumer price inflation forecast to reach 3% in 2005 and 2.8% in 2006.
  • Interest rates expected to rise to 4.25% by end-2005 and 5% by the end of 2006.
  • Real GDP growth forecast to slow to 3.5% in 2005 and 2.9% in 2006.
  • World GDP growth forecast to slow to 4.2% in 2005 and 4% in 2006.

Sources:

  • The Economist Intelligence Unit

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