U.S. growth bounces but to weaken later this year

NEW YORK (Reuters) - U.S. economic growth probably improved in the second quarter with inflation up too, but interest rates are seen remaining steady due to the housing slump and shaky banking system, a Reuters poll showed.

The latest trouble in the financial system which led to a government bailout plan for Fannie Mae and Freddie Mac -- the second this year after the near collapse of Bear Stearns -- has raised concerns of more bank failures and damage to the economy.

Most economists in the poll expect growth to falter later this year as consumption is restrained, housing continues to buckle and effects of the government's stimulus package fade.

Economists hope this should keep core inflation, stripped of food and energy prices, under control. But as a group they have again upgraded the overall price outlook for this year.

"The lingering drags from housing combined with the slow healing in the financial sector ought to provide at least one source of eventual stability in containing the threat of a runaway inflation," said Citi's chief U.S. economist Robert DiClemente in a note to clients.

The poll found U.S. gross domestic product (GDP) is expected to grow a median 1.3 percent in 2008 and accelerate to 1.8 percent in 2009.

This stronger than the 1.1 percent 2008 forecast in a Reuters poll last month but the 2009 forecast is much weaker than 2.3 percent polled in June. That was the biggest downgrade to a U.S. full-year GDP forecast since the credit crunch began.

GDP was expected to have grown a median 1.5 percent, annualized, in the second quarter, up sharply from 0.2 percent in last month's poll and 1.0 percent in the first quarter.

But the chance of a recession in the next 12 months has risen since the last poll. The median forecast put the probability at 60 percent, up from the 50 percent in the previous poll. The latest survey was conducted July 16-23.

INFLATION FORECASTS RISING

The survey showed headline inflation at a median 4.4 percent in 2008 compared with 4.0 percent in the June poll, largely due to a run-up in energy and food costs.

The core consumer price index, which excludes volatile food and energy prices, was relatively stable at a median 2.3 percent in 2008 and 2.2 percent in 2009. Both forecasts were unchanged from the previous poll.

Unemployment was set to hit a median peak of 6 percent in the second quarter of 2009, according to the poll. The jobless rate was at 5.5 percent in June.

Monetary policy, already constrained by rising prices despite tepid domestic growth, is expected to remain steady until the end of March 2009, the survey showed.

"To undermine (banks') investment portfolio at this time is foolhardy. This means no change in rates until earnings have stabilized at banks," said Don Ratajczak, economist at Morgan Keegan.

Despite an upward revision in growth forecasts, Federal Reserve Chairman Ben Bernanke gave a more downbeat outlook for the economy in semi-annual testimony last week, saying there were significant downside risks.

This contrasted to the Fed's statement after the rate-setting meeting in June when it said downside growth risks "appear to have diminished somewhat".

The Fed kept the key overnight rate at 2.0 percent in June, ending an easing cycle where it cut the fed funds rate by 325 basis points from mid-September last year until April this year.

Respondents were also polled on their views of the prospective candidates for the U.S. presidential election.

A majority of those polled thought the stock market would fare better in the first year following a victory by Republican candidate John McCain than his Democratic rival Barack Obama.

(Polling by Bangalore Polling Unit; Editing by David Stamp)