Where will the U.S. economy head in the next three years? UBS predicts: it will fluctuate in a slowing expansion

According to the Zhitong Finance APP, UBS recently released a report on the U.S. economic outlook, forecasting and analyzing the U.S. economy from 2025 to 2027, covering various aspects such as economic growth, employment, inflation, and policies. The bank stated that the U.S. economy will fluctuate in a decelerating expansion over the next three years. Excluding volatile factors, the reduction in government spending support and the slowdown in real income growth indicate that the economy will further slow down in 2025.

UBS stated in the report that it expects the U.S. economy to continue to fluctuate around a decelerating expansion trend in 2025. In 2023, the real Gross Domestic Product (GDP) of the U.S. grew rapidly, reaching 3.2%, with non-farm employment increasing by an average of 216,000 jobs per month. In 2024, real GDP is expected to grow by 2.5%, with employment increasing by an average of 168,000 jobs per month. Excluding volatile factors, the reduction in government spending support and the slowdown in real income growth indicate that the economy will further slow down in 2025, with the new government's fiscal policy having a greater impact in 2026.

The expected changes in the new government's fiscal policy will have a greater impact in 2026 than in 2025. It is worth noting that Federal Reserve Chairman Jerome Powell has warned that the Federal Open Market Committee (FOMC) has a more complex response to tariffs than expected.

Inflation is expected to continue to decline in 2025, and combined with risks in the labor market, this will prompt the Federal Reserve to cut interest rates in 2025. Last spring, the market expected only one 25 basis point rate cut in 2024, but the actual rate cut by the Federal Reserve reached 100 basis points.

Additionally, the bank provided a detailed explanation of the economic conditions in various sectors. The bank stated that the business sector is expected to perform poorly in the fourth quarter of 2024, with a rebound anticipated in the first quarter of 2025, but this remains to be seen. The announced capital expenditure intentions remain low, and hiring plans are still weak. Without strong consumer demand and fiscal support, the business sector may perform even weaker. Looking ahead, uncertainties in tax and trade policies may increase.

At the same time, investment risks are suppressed by uncertainty. Historically, uncertainty has suppressed investment in the business sector. The U.S. Congress still has many decisions to make regarding tax policy, and there is uncertainty in trade policy as well. Additionally, Congress may extend the tax law for another year due to time constraints.

The labor market is expected to slow down, consistent with the overall economic trend. In the second half of 2024, non-farm employment is expected to increase by an average of 165,000 jobs per month, with the private sector increasing by an average of 129,000 jobs per month (this performance is poor for a period of economic expansion in the U.S.). With the slowdown in employment growth, the bank expects the future trend to be about 150,000 new non-farm jobs per month and about 120,000 in the private sector. This also includes a slight overestimation that continues to exist.

Currently, measurement issues are still troubling labor market analysis from multiple dimensions. Meanwhile, the bank believes that fluctuations in the labor market will prompt the Federal Reserve to consider cutting interest rates.

The bank stated that the potential economic growth in the U.S. may be boosted in the future, but it may slow down. In 2023 and 2024, the surge in net international migration may have boosted potential GDP growth, but this boosting effect is expected to weaken The aging population exerts downward pressure on the labor force participation rate (LFPR) and potential growth. Since the first quarter of 2000, the annualized growth rate of productivity has been 1.8%, which is not significantly different from the 1.6% trend observed after 2003.

On the issue of inflation, UBS's view is equally clear, with a thorny path ahead. The overall personal consumption expenditures (PCE) inflation rate has fallen from over 7% back to the Federal Reserve's target level of 2%. However, the core inflation rate remains significantly above 2%. Tariffs are expected to lead to a moderate increase in inflation by 2026, and the extent of their impact is crucial for interest rate decisions.

Rent is a major factor preventing inflation from falling to 2%. With rising rental vacancy rates and slowing growth in alternative market rental data, the pace of rent increases is expected to further slow down.

In terms of fiscal policy, the impact of fiscal policy on economic growth was significant in 2023, but its influence is expected to gradually weaken in 2024, with further weakening anticipated in 2025.

Regarding monetary policy, the bank believes that the Federal Reserve is expected to continue adjusting interest rates to a neutral level, approaching 3.5% by the end of 2025. If inflation decreases and labor market risks increase, the Federal Reserve may further cut interest rates, but policy adjustments depend on various factors and carry uncertainties.

At the same time, UBS also mentioned numerous potential risks affecting economic growth. The U.S. economy faces risks such as a softer landing than expected, stubborn inflation, slower growth than anticipated, and reaching the zero lower bound on interest rates. Policy uncertainty is high, with tariffs, tax policies, and Federal Reserve policies reliant on data fluctuations. Changes in immigration policy may reduce population growth, thereby impacting potential GDP growth and the economy's "speed limit."