US real GDP growth to slow to 0.4% annual rate during H2 2023: CBO

After this year, growth will accelerate as monetary policy eases. Real GDP will increase by 1.5 per cent next year and by 2.4 per cent in 2025, CBO estimates.

The unemployment rate will reach 4.1 per cent by the end of this year and 4.7 per cent by the end of next, before falling slightly to 4.5 per cent in 2025.

The US trade deficit is projected to shrink in relation to GDP over the next year before stabilising in the middle of 2024. CBO expects growth in exports to roughly match the growth rate of imports in the third quarter of 2023 and then to outpace growth in imports over the following four quarters.

That trajectory reflects three factors: the foreign exchange value of the dollar is expected to continue a decline that began in late 2022; rates of economic growth among major US trading partners are projected to rise starting in early 2024, boosting demand for exports; and weak growth in domestic demand is expected to dampen demand for imported goods and services.

As a result, in CBO’s projections, the trade deficit will shrink from 3.4 per cent of GDP in mid-2023 to 3.1 per cent in mid-2024. Over the second half of 2024 and in 2025, the trade deficit generally remains stable as stronger growth of domestic demand boosts growth in imports, roughly offsetting the continued increase in export growth.

Inflation is expected to decline throughout 2023 and 2024 for three main reasons.

Overall and core inflation, measured year over year, had already begun to slow in the first quarter of 2023 as supply-side pressures on the prices of many goods, including food and energy, abated. CBO expects that trend to continue through the end of 2023.

Slower economic growth in 2023 and the higher unemployment rate are projected to put downward pressure on price growth, because they slow demand and inhibit increases in wages, which contributes to increases in the prices of certain services.

Higher interest rates are expected to put downward pressure on the prices of certain goods and services—especially shelter services and other goods and services whose prices are highly sensitive to interest rates. Slowing growth in home prices, including declines in some regions, is expected to pass through to the prices of shelter services. In CBO’s projections, inflation in such prices eases throughout the second half of 2023.

Inflation will slow this year as factors that caused demand to grow more rapidly than supply in the wake of the pandemic continue to ease. The rate of inflation will continue to exceed the Federal Reserve’s long-run goal of 2 per cent from 2023 to 2025, but it will approach that goal as it declines throughout that period.

ALCHEMPro News Desk (DS)