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S&P economist expects slow-growth decade

Slow-growth projection: Beth Ann Bovino, S&P's US chief economist

US economic growth is likely to fall to below 2 per cent over the next decade, US chief economist for Standard & Poor’s, told a conference in Hamilton yesterday.

Beth Ann Bovino said the slowing growth would be driven by retiring baby boomers leaving the workforce in droves.

She told S&P’s Bermuda Reinsurance Conference that the result of US midterm elections on Tuesday, which saw the Democratic Party gain control of the House of Representatives, was unlikely to cause “any derailing of the US expansion”.

Ms Bovino said S&P projected 2.9 per cent growth in US gross domestic product for 2018, dropping to 2.3 per cent in 2019, 1.7 per cent in 2020 and a 1.8 per cent growth rate over the next ten years.

Headwinds included trade tensions potentially turning into a trade war, policy risks, record levels of corporate debt and the US fiscal situation.

“Labour participation is at a 40-year low,” Ms Bovino said. “Three-quarters of that is down to people retiring, but one quarter is about of people of prime working age — in terms of numbers that’s about two to three million people who are not working.

“Those households do not have income for themselves and their families and we lose their productivity, so the growth rate could be even lower if that continues.”

She said the demographic trend would also put pressure on US government finances, especially on the 50 per cent of public spending that went to healthcare and social security, spending that was politically “untouchable”. She expected the deficit to widen to $1 trillion.

“For us, the biggest worry is the fiscal side of things,” Ms Bovino said. “Fiscal spending is the wild card for both the US economy and the Fed.”

Further fiscal pressure would come from rising interest rates — about 7 per cent of fiscal spending went on debt servicing when the ten-year Treasury rate was at about 2.5 per cent, she said. Yesterday, it closed at 3.19 per cent and as interest rates rose further, so would the cost of the burgeoning US national debt.

However, she said S&P had a low expectation — a 10 to 15 per cent chance — of a recession within the next 12 months. Household debt relative to income had stabilised and was in much better shape than in 2006, she said. And while non-financial corporate debt had climbed to a record level, 40 per cent of it rated BBB by S&P, balance sheets were in much better shape than before the global financial crisis of ten years ago, with more cash.

Fundamentals supported near-term growth, bolstering the case for a further interest-rate hike by the US Federal Reserve in December and three more next year.

“Job gains have been averaging 200,000 per month this year, and wages picked up last month by more than 3 per cent year over year, so there is a tight jobs market,” Ms Bovino said.

The wage gain rate was probably distorted by the impact of last year’s hurricanes, she said.

“Job openings have been at record highs and wage gains are low, so what’s the disconnect?” Ms Bovino said. “We think it’s likely that there is a skills mismatch in the US.”

The traditionally strong inverse relationship between the number of job openings and the unemployment rate had weakened in the past five or six years, she added.

“That suggests to us that we have labour-market inefficiencies in the US and that’s a worry, not just for household income, because people have less money to spend, but also for lost productivity and lost growth going forward.”

She suggested that another indicator was not behaving in line with the norm.

“We’ve seen capacity utilisation rate reach 80 per cent, which usually means businesses will expand,” she said. “That’s the first time this has happened since 2007.

“The question is: will they spend? We thought we saw some activity possibly tied to taking advantage of incentives in the tax package, but it’s dropped in the third quarter and that’s a worry. Is it that companies are worried about the outlook?”

Ms Bovino expected core inflation to rise about the Fed’s 2 per cent target, driven by healthcare costs climbing as demand from the ageing population grew.