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CBO lowers US economic growth forecast for 2018, warns of tariff impact

The Congressional Budget Office slightly cut its 2018 growth forecast for the U.S. economy and warned of increasing uncertainty over trade policy and bigger-than-expected impact of tariffs.

Real GDP is projected to expand by 3.1% this year, down from the previous 3.3% growth estimate in April but faster than the 2.6% expansion in 2017, according to a new report from the nonpartisan agency.

"The pickup in growth is largely the result of increases in government spending, reductions in taxes, and faster growth in private investment," the report stated.

Economic growth should moderate in the second half of the year as several of the factors that drove the 4.1% expansion in the second quarter are expected to either weaken or reverse, including consumer spending and agricultural exports, the CBO said.

For 2019, the CBO maintained its forecast that growth will slow to 2.4% due to weaker business investment and government purchases.

Real GDP growth should further slow to 1.7% in 2020, according to the CBO, before averaging 1.6% annually in the following two years and 1.7% each year from 2023 to 2028.

The CBO, which finished its latest projections in early July, warned that the impact of trade tensions on GDP growth could be larger than currently expected.

"When CBO completed its current economic forecast, the agency estimated that the macroeconomic consequences of the U.S. tariffs and foreign retaliatory tariffs that had been implemented at that time would be small," the CBO report read.

"However, trade policy has already changed since early July and may continue to evolve, so the effects of new tariffs on the economy — and thus on CBO's future projections — may become more substantial," the report added.

The CBO also cautioned that heightened trade policy uncertainty could discourage businesses from making capital investments. "Recent volatility in equity markets might indicate that such uncertainty is already taking a toll on the value of U.S. businesses," the CBO said in its report.

The CBO report was released about a week after the Trump administration announced that it would proceed with imposing 25% tariffs on $16 billion of imports from China, which retaliated with its own tariffs.