UBS's Watt Sees Signs of a Slowing US Economy

You're also concerned about a slowdown going into the second-half. What scale of slowdown? And does that play through to the disinflation narrative? Good morning, Abigail. Good morning. Thank you so much for having me join today. Yeah, as you say, I think we're tracking currently for the first half of 2024. We're currently tracking that GDP will come in below 2%. And if we think about the kind of booming kind of 3.1% growth that we saw in the US economy through 2023, we think that is a fairly marked slowing. And going into the second-half of the year, we're also expecting the economy to continue to slow. We think that over the course of the year, the economy will expand below around below 1 1/2%. So we we think this is a fair slowing. There's a couple of drivers there. The first is that we think consumption will begin to slow. We also think that fiscal stimulus was a big part of the story in 2023 and we think it will be less of a boost for growth through this year. And then finally, we think business investment will remain relatively subdued. In particular, we think that there's some scope that policy uncertainty around the election in the third quarter could hold back some, some investment from from the business sector as well. So Abigail, I mean there have been some Fed officials that have started to kind of sound like you. Mary Daly is perhaps one who said that maybe Lisa Cook too. Yet Michelle Bowman now for two days in a row has beat the hawkish drum. Today she yesterday she was speaking in London at a closed door event and reiterated the line that it wasn't time to cut rates, that inflation was still a problem. Given you see a slowdown, are you concerned that Fed officials are setting their policy to yesterday's data and and risk a policy mistake by not cutting soon enough? Yeah. So it is interesting. We have heard kind of fairly mixed comments from from various FOMC members since the June meeting. I'm generally at the the June press conference, Chair Powell reiterated the strength of the economy and the the kind of strength of the labor market in particular. And one of the things that kind of surprised us about the June meeting was that some of the language in this statement didn't acknowledge some of the slowing that we've seen. You know, Q1 GDP came in at 1.3%. We're expecting that to to revise up a touch to 1.4% in the data later today. But ultimately, we do think you are seeing that slowing and it is it is a fair question. The extent to which that is is kind of feeding into the narrative from the FOMC. Well, one narrative that we're going to debate probably for the whole 60 minutes tomorrow morning when we go forward 24 hours is the debate between President Biden and former President Trump. Now, we had Adam Posen with us yesterday. He talked about the risk, the material risk of a shift of immigrants out of the country, anywhere between 1.3 to 7.5 million immigrants removed from the system over the next three years and the prospect of much more aggressive tariff regime. We don't know what will be delivered tonight. We're going to hopefully get a little bit more intimation about where Trump stands on some of these things. But that prospect delivers stagflation on a baited stagflation. Is that a a mighty worry for the UBS economics team? Yeah. So in our economic outlook that we published last year in November, you know, we we acknowledged, you know, the risks around the election, We see kind of three key areas of policy that, you know, we're watching closely. The first would be fiscal policy, the expiration of a great number of provisions for individual income tax policies, you know, expiring at the end of 2025. The second would be around that immigration element. You know, the the increase in immigration through 2023 was a big part of the labour market rebalancing that we've seen and the ability for us to continue to see kind of waning wage pressures and some of that kind of disinflation and that inflation progress through 2023. So obviously that's one of the other elements that we'll be looking out for. And then I think as well on, on tariffs, obviously that that is another element of the policy that we'll be looking out for. And in particular, I guess thinking about some of the the possible kind of inflationary impacts and the impacts on the gross inflation mix in the US economy as a result of those. Abigail, you put that all together and it is a 2025 that is just wholly unknown. You look already what's happening around the world, inflation surprises from both Australia and Canada in just this week alone. Do you think that's instructive at all for thinking about 2025 that the threat of moving down an inflation of getting rates back to normal will have this bumpy Rd. where we need to rethink things? So our expectations on the inflation side are that we continue to see that inflation progress. I mean we did see obviously a better inflation report on last week in May CPI release. I'm you know, the headline was, was certainly more encouraging. Obviously the rent component of the index was still a little bit stickier than we perhaps like. But our expectation is that we do see progress on inflation continuing. And a big part of that is our expectation that we think the economy will continue to slow. And as we see that slowing and the continued kind of slowing in the labour market and the loosening in the labour market, we do think that that will lead to kind of core PCE inflation coming in at around 2.1% by the end of 2025. So that's our base case assumption in terms of the outlook, I'm for inflation.