The latest stream of soft data from the US prompts us to revise down our GDP growth forecast for Q1 to 1.7% q/q AR from 2.7% previously. For the year as a whole, we now expect GDP growth of 2.8%, down from 3.0%.
Following yesterday's retail sales report for February, we forecast private consumption growth at 2.8% q/q AR in Q1, assuming some rebound in March spending from the weather-induced weakness in February. This is well below our previous expectation of 3.4% q/q AR private consumption growth this quarter.
That said, real retail sales have actually not been that weak lately and it does seem that consumers have spent some of the money saved due to lower oil prices. In January, real retail sales growth was 8.9% annualized over three months, but after the weak February data, the growth rate has come down closer to 4%. We expect a rebound in the coming months and continue to look for private consumption growth around 4% q/q annualized in Q2.
Construction spending has been soft lately, partly due to bad weather. Based on a decline in the AIA billing index and weakness in private non-residential construction spending on a monthly basis, we now expect completions to fall 7.8% q/q AR in Q1. Weakness has also been evident in housing starts and monthly data on construction investments, and we estimate that residential construction increased a modest 2.0% q/q AR in Q1. Net exports also look to be a larger drag on Q1 GDP growth than we previously thought: we now expect net exports to subtract 0.4% points from Q1 growth.
Although the stream of data early this year has been on the weak side of expectations, we remain constructive on US growth this year. As in Q1 last year, weather seems to have been an important factor restraining economic activity lately. The backdrop for growth is still favorable in our view though. The stronger US dollar will likely hold back exports this year, but the negative impact on GDP is largely offset by the continued low oil price.
The outlook for private consumption remains strong as real income growth is supported by strong job growth and low headline inflation. Further, as the labor market tightens, history has shown that wage growth follows with a lag and we expect wage inflation to pick up in H2 this year.
While we expect the Fed to start its hiking cycle in June this year, longer-term interest rates should be capped by global monetary easing which should support the housing market in particular. Hence, we continue to see GDP growth solidly above potential this year and we think that developments in the labor market are more important to the Fed than short-term weakness in GDP growth. We thus stick to our view that the Fed will deliver its first rate hike in June.
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