OREANDA-NEWS. A narrowing output gap and approaching monetary tightening are reducing the US economy's ability grow at around 3% a year, Fitch Ratings says. We cut our outlook for US growth to 2.2% in 2015 and 2.5% in each of 2016 and 2017 in our latest quarterly "Global Economic Outlook", published on Tuesday, down from our previous forecasts of 3.1% for 2015 and 3.0% for 2016.

Our lower full-year growth forecast for 2015 follows a weak first quarter in which the US economy contracted 0.2% on an annualised basis. Temporary factors such as the West Coast port strike and very cold weather on the East Coast were partly to blame. Without these, growth can bounce back in 2H15 as the labour market continues to strengthen. The economy created 223,000 jobs in June and the unemployment rate fell to 5.3%, although average hourly earnings did not grow.

The US is growing faster than the eurozone and many other high-income countries, but a number of supply-side and demand-side factors mean its economy is unlikely to sustain 3% annual growth through 2016-2017. The recovery from the recent recession has been more sluggish than in previous episodes. The labour force is growing more slowly than in previous decades due to demographic changes.

Consumer spending growth is picking up but still lags behind the improving labour market, rising household wealth and confidence indicators, and consumers appear more inclined to save since the financial crisis. The housing sector is growing modestly. A stronger dollar and slower growth in trading partners undermines export performance. Higher bank lending has partly been directed towards M&A rather than greenfield investment. Productivity-enhancing public investment is also low.

Not only is the supply of capital and labour growing more slowly, but Bureau of Labor Statistics data this week showed total factor productivity increased at an annual rate of 0.8% last year - lower than the 1.4% average in 1995-2007. Slower productivity growth combined with temporary shocks such as those in 1Q15 means annual US GDP growth has averaged just 2.2% since 2010. As the output gap gradually narrows, growth rates should converge with potential output at around this level.

The US economy is also heading into a period of monetary tightening. We expect the first Fed rate increase before the end of 2015. We also expect the pace and extent of tightening to be subdued by historical norms, but higher rates will increase debt-servicing costs, and even a gentle exit from a long period of loose monetary policy could increase financial market and asset price volatility, affecting household wealth and confidence.

Our lower growth forecasts make a marginal difference to our long-run forecasts for general government debt, which were already based on a conservative post-2017 growth assumption. We still expect general government debt to start to increase again from 2018. The medium-term fiscal outlook has been supported by lower-than-expected healthcare costs and low interest rates. However, as the Congressional Budget Office has pointed out, without reforms to mandatory spending and/or higher taxation, the deficit will rise again as the population ages, and healthcare costs and government debt-service costs rise. The CBO forecasts deficits approaching 4% of GDP by 2025, putting debt on an upward path.