US economy to continue to grow significantly above potential - Nomura

Analysts at Nomura expect the US economy to continue to grow significantly above potential in 2018 and H1 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 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.”

“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.”

“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, the waning fiscal stimulus in 2019, with the possibility of a fiscal cliff in 2020, could cause market concerns.”