Our calculations indicate that second-quarter GDP growth accelerated to 2.5% annualised, thanks primarily to a massive 4.5% surge in real consumption. The latter would mark the biggest quarterly gain in a decade. Although we expect consumption growth to moderate in the second half of the year, GDP growth for the year as a whole will be still be around 2.0%, because the drags from external trade and mining investment will be partly reversed. Even if growth remained at that level over the next few years, that would still be sufficient to absorb any remaining slack. Indeed, the slowdown in trend productivity and labour force growth mean that potential GDP growth could be as low as 1%. Accordingly, as mounting domestic price pressures trigger a rapid acceleration in inflation, we expect the Fed will be forced to raise the fed funds rate to between 1.75% and 2.0% by end-2017.
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