“With the output gap already positive, how sustainable is above-potential growth? Not very, in our view,” Bill Diviney, a senior economist at ABN AMRO, notes.
“After a strong 2017, growth has already slowed into 2018, with GDP falling -0.9% qoq annualised in Q1, driven by weak private consumption and a downturn in residential investment following a period of relative strength in the housing market. GDP rebounded in Q2 by 1.9% qoq annualised, on the back of a strong recovery in private consumption, but this pace is unlikely to be sustained.”
“First, as discussed below, the labour market is exceptionally tight, and the main source of growth from hereon is likely to be from productivity and real wage growth rather than employment gains. Second, global trade is facing increasing headwinds from protectionism, and China’s economy also looks to be slowing in the second half. This should partly offset some of the tailwinds from somewhat stronger US and eurozone growth.”
“Finally, part of the strength in investment we have seen is a result of preparations for the 2020 Tokyo Olympics. As this spending starts to slow, investment growth is likely to cool significantly – although we expect the impact of this to be more apparent in the second half of 2019. This will also coincide with the consumption tax hike, although we expect the impact from this to be much smaller than the previous hike, given that the relative change in the tax rate is much smaller (from 8 to 10%, compared with from 5 to 8% the last time around), and with the economy on a stronger footing. All told, we expect growth roughly in line with potential for this year and next, at 1.0%.”