Euro Zone interest rates on way up, says BoI economist
Although the US economy has moderated over the Summer, with GDP growth falling back to 3%, consumer spending growing by only 1%, and employment rising by less than expected in July, there are indicators that the economy is poised to pick up again in the short term, according to Michael Crowley, senior economist, Bank of Ireland Global Markets.
Writing in Bank of Ireland Global Markets Economic Bulletin for August, which was published today, he states that with both retail sales and manufacturing output recovering strongly from a soft spot in June, the Fed is optimistic of an upturn in activity.
"The US economy seems better placed now than at any other time over the past two to three years to absorb the effects of higher oil prices," he said.
"It has added 1.2m jobs since the start of 2004 and incomes are rising strongly even after allowing for the impact of higher inflation resulting from the rise in energy prices. This should ensure continued steady growth in consumer spending and hence in the broader economy.
"Therefore, we still expect the Fed to raise interest rates by 25bps at each of its three remaining meetings this year, which is more than the market expects. This means the recent fall in bond yields is likely to be reversed over the balance of the year, while the dollar should strengthen from current levels", said Mr Crowley.
Notwithstanding this, he says that the next employment report due in early September assumes even greater importance than usual as financial markets need to see a rebound in employment before being convinced of an upsurge in economic activity.
Commenting on the outlook for the Euro Zone he says the ECB is likely to begin raising rates by the end of the year.
"A necessary condition for the ECB to raise interest rates is that the economy returns to growth in excess of its longer-term trend rate of 2-2.5%. It is moving in that direction, though some uncertainty remains over how quickly it will get there. Rising oil prices have boosted inflation at a time when disposable incomes are rising slowly, which may delay a recovery in consumer spending.
"This should not, however prevent growth moving above its longer-term trend and the resulting increase in interest rates at the end of this year", said Mr Crowley.
