Lean times ahead? Mark Zandi

The economy has been full of surprises this year, starting with economic troubles in China that helped fueled two months of financial market turbulence and raised worries the U.S. economy could be headed for a recession. Economic forecaster Mark Zandi shares his thoughts on what investors can expect going forward.

Q: Once again, we had a weak start to the year. In the first quarter, gross domestic product expanded at a lacklustre annual rate of 0.8 per cent. What are you expecting over the next three quarters?

A: In the current April-June quarter, GDP is now tracking closer to 3 per cent. I think we will settle in around 2.5 per cent growth for the second half of the year. For the year as a whole, growth will come in at just about 2 per cent, which is what we have averaged for each year since the recovery began seven years ago.

Q: Federal Reserve officials included a surprise in the minutes of their April meeting, indicating that they might raise rates at their next meeting on June 14-15, something that investors had not expected. What is your outlook for the Fed?

A: I don’t think the Fed has prepared markets sufficiently for a June rate increase. But I do expect a rate hike at the July meeting, and if not in July, then in September. And I do anticipate a series of rate hikes through 2017 and 2018, in large part because the U.S. economy is closing in on full employment very rapidly. I think the Fed will pretty soon run the risk of an over-heating economy if they don’t normalize rates more quickly.

Q: What should investors be doing in an environment of rising interest rates?

A: I recommend that they buckle in. We had a strong market rally up until a year ago. The stock market went essentially straight up, and interest rates remained low. That was a period of very rapid returns on investments. We had the good times, and now we should expect some lean times.

Q: How long will the lean times last in terms of investment returns?

A: I really think it probably won’t be until rates have normalized, and the economy has adjusted to that. And that is toward the end of the decade and perhaps even longer, into the next decade.

Q: In your forecasting horizon, do you have a recession or do we weather all of these rate hikes?

A: You know, obviously, there will be another recession. If I had to pick a date, it would probably be 2019 or 2020. The risk of a recession will rise the longer it takes the Fed to normalize interest rates because that means the risks of the economy overheating will be increasing.