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BofA Drops GDP Forecasts, Sees QE Tapering by March

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Bank of America-Merrill Lynch (BAC) said Monday it has “refreshed” its views on the U.S. and global economy for 2014, sharing a mix of slightly good and bad news with investors.

For the first quarter of next year, it expects economic growth of 2.5%, down from its earlier forecast of 2.8%.

The reason? A lack of stronger momentum in recent data, explains economist Ethan Harris.

For the full-year 2014, it’s trimmed its estimate for GDP growth to 2.6% from 2.7%.

But the group remains optimistic, citing “fading” fiscal headwinds that “can be stopped through balance sheet repair.” Plus, says BofA, that repair process is “well advanced,” which sets the stage for both stronger growth and low inflation.

“Inflation is likely to remain stuck close to 1% for an extended period of time,” Harris wrote. “Global pressures have faded as commodity markets cool and emerging markets slow down. There is abundant spare capacity in the U.S. and globally.”

Super-Slow Fed, Global Growth

Citing low inflation, BofA experts believe the Fed’s quantitative easing program is likely to slow down at a tepid pace.

“We now think tapering is slightly more likely to start in March rather than January. We think QE will not end until December [2014],” explained the economist.

Moreover, the group doesn’t see the first hike in interest rates coming until the first quarter of 2016.

“We are similarly optimistic on the global outlook,” Harris said. The bank expects “trend-like growth in 2014 as Europe slowly exits its recession and as the global manufacturing cycle picks up. As in the U.S., inflation is likely to remain quite subdued.”

As for how inflation can drop as growth rises, he notes that inflation “normally doesn’t accelerate until growth has been strong enough for long enough to create capacity pressure. Indeed, at the beginning of economic recoveries, inflation tends to fall even though growth is very strong.”

Furthermore, in the current cycle, structural headwinds and policy shocks have “delayed a normal recovery,” says Harris. “Hence, four years into the recovery, there is still spare capacity and disinflationary pressure.”


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