The U.S. economy cannot grow faster without its budget deficit rising, either through increased spending or lower taxes, according to one investment strategist. But getting there won't be politically easy.
The "fiscal deficit has to widen. If it doesn't widen, growth will slow down in the second half," Krishna Memani, chief investment officer at OppenheimerFunds, told about 200 clients last Thursday at the firm's outlook event.
"Unfortunately, the people that the administration relies on to get those things passed are not enamored with fiscal spending," he said.
Annual projected federal budget deficit (2016-2020)
Source: OppenheimerFunds, Congressional Budget Office and Tax Policy Center as of 1/31/2017.
Last Tuesday, a report showed U.S. gross domestic product grew 1.6 percent in 2016, the slowest since 2011.
President Donald Trump has said the U.S. economy will grow at least 4 percent a year under his policies, and Treasury Secretary Steven Mnuchin expects 3 percent growth. The administration also claims it can achieve that growth without boosting the U.S. budget deficit, because Washington will supposedly cut spending enough to offset reduced tax revenue.
Budget Director Mick Mulvaney said in February that the administration aims to offset a $54 billion increase in defense spending with reduced domestic spending. Trump's budget is expected next week.
However, Oppenheimer's Memani said 3 percent growth is possible only if politicians choose to expand the fiscal deficit temporarily, by spending more or taking in less money. "If we don't do that, the likelihood we get sucked into a downward swirl is pretty high," he said.
For now, the U.S. market is showing some signs of losing confidence in an economic boost dependent on fiscal spending, Memani said.
He pointed out that:
Memani likes emerging market and European stocks better than those in the U.S., where the major indexes are at record highs. His firm still favors stocks over bonds, however, as he expects interest rates to remain low.
"The Fed is gradual, and I expect them to be gradual," Memani said. "They are not the driver. The driver today is fiscal policy."
— CNBC's John Harwood and Ylan Mui contributed to this report.