Analysts at Nomura expect the US economic growth to slow towards potential over 2019 and into 2020 as the boost from stimulative fiscal policy wanes.
Key Quotes
“Job gains remain well above the long-term sustainable pace and will likely continue to put downward pressure on the unemployment rate through 2019 before tighter monetary policy and financial conditions eventually slow employment growth. However, we expect slow productivity growth to persist, held down, in part, by structural declines in underlying business dynamism, limiting wage growth.”
“Inflation: For 2018-20, we expect core inflation to pick up gradually as labor markets tighten and the economy moves towards potential. Core PCE inflation could pick up slightly faster than core CPI as healthcare service price inflation could accelerate while rent inflation gradually slows. With upside risk to healthcare prices and expected further labor market tightening, we expect core PCE inflation to reach 2.3% in Q4 2020.”
“Policy: Facing strong momentum in aggregate demand, tightening labor markets, and inflation at the 2% symmetric target, we expect the Fed to hike one more time in 2018 and two times in 2019 before taking a pause through 2020. With our neutral rate estimate between 2% and 2.25%, we believe monetary policy will remain in a slightly restrictive stance for some time, tightening financial conditions. We think the roll-off of the balance sheet will continue to exert upward pressure on long-term interest rates, as will the large increase in the federal budget deficit.”
“Risks: Recent market activity, and history, suggests financial conditions can turn quickly. Protectionist US trade policy remains a key risk as US-China tariffs take effect and the US moves forward with an investigation into imports of autos and auto parts. In addition, we see elevated risk of a partial government shutdown in December; the possibility of brinksmanship around the debt ceiling in 2019; and a looming fiscal cliff next autumn owing to remaining caps on discretionary spending in FY20. This reinforces our view that fiscal policy will contribute less to growth next year in 2019.”
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