Expectations for 2005

Here’s further confirmation that influential market participants don’t expect any serious trouble for the US economy this year:

LONDON (Reuters) – Interest rates will continue rising steadily this year, with tightening also expected in Canada and — in the final months of 2005 — in the euro zone, a Reuters poll of more than 150 economists showed Tuesday.

…The median forecasts in the poll, taken last week, showed the Fed funds rate adding another 150 basis points to end the year at 3.75 percent and rise further to 4.25 percent by the end of 2006.

The European Central Bank — whose 2 percent refi rate was overtaken by Fed funds in December — was seen starting to play catch-up towards the end of the year, but slowly… The mid-range forecasts showed the ECB increasing rates to 2.25 percent by the end of the year and to 2.75 percent by September 2006 as domestic demand finally picks up.

This suggests that the median economist expects economic growth in the US to continue to be substantially faster than growth in the euro zone, for the fourth year in a row.

One important side effect of this will be to worsen the US’s current account deficit. When the US grows faster than the EU, the US’s trade imbalance tends to worsen, as the chart below suggests.

So market participants think that the US will enjoy healthy growth this year, interest rates will rise, and the US trade imbalance (and implied borrowing needs) will continue to grow, for at least the next year or two.

One last interesting finding in the survey regards Japan:

In Japan, an economic slowdown expected this year will probably ensure the Bank of Japan sticks to its zero interest rate policy for some time.

“For the absolute foreseeable future, we expect no change in the zero interest rate policy,” said Baader at Lehman Brothers.

“We would see (hikes in Japan) if we foresaw an end to deflation and if we thought that Japanese growth was going to be stronger. (But) we actually look — out of the big regions — for by far the most pronounced slowdown to take place in Japan, in 2005 versus 2004.”

Will their deflation ever end?