Analysts at Nomura expect the US economy to continue to grow significantly above potential in 2018 and 2019, supported by stimulative fiscal policy, before growth decelerates towards potential over 2019 and into 2020.
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: Transitory factors that that held down inflation in 2017 have largely abated. For 2018-20, we expect core inflation to pick up gradually as labor markets tighten and the economy moves towards potential. Core PCE inflation may pick up slightly faster than core CPI as healthcare service inflation could accelerate while rent inflation gradually slows. With upside risk to healthcare prices as well as expected further labor market tightening, we expect core PCE inflation to reach 2.4% 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 two more times in 2018 and two times in 2019 before taking a pause through 2020. With our neutral rate estimate between 2-2.25%, 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: Financial conditions remain accommodative but recent market activity, and history, suggest they can turn quickly. In our view, 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, waning fiscal stimulus in 2019, with the possibility of a fiscal cliff in 2020, could create market angst.”
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