US economy maintains momentum

Tax cuts implemented by the Trump administration have provided a strong boost for economic growth in the United States and the effects are likely to continue into next year. Conversely, we do not expect the trade dispute to have any significant braking effect for the time being.

Not only is there no sign of the US economy slowing in the ninth year of the upturn. Economic growth looks set to reach its highest level for three years at close to three per cent this year. Economic impetus in the current and the next quarter is likely to lag only slightly behind the strong spring quarter. Impetus from investment activity will probably be even stronger here than we initially assumed. We have therefore raised our growth forecast for next year from 2.5 to 2.7 per cent.

Sentiment in the US economy could scarcely be any better, as reflected in surveys of all sectors of the economy. The ISM survey revealed that industrial sentiment increased to 61.3 points in August, its highest level since May 2004! Consumer sentiment has also literally scaled new peaks. The August reading in the Conference Board survey reached its highest level for 18 years, with assessments of current conditions and expectations both improving again. This does not come as any great surprise given the very buoyant labour market. Job creation in the USA is going from strength to strength as borne out by the latest labour market reports.

Our inflation picture remains unaltered. The average inflation rate should reach 2.6 per cent in 2019, unchanged from this year. We are assuming a slightly weaker overall trend in energy prices here and a gradual pickup in wage growth. Against this background, the central bank is likely to maintain its moderate tightening stance next week.

The trade conflict nevertheless remains an element of uncertainty, and has certainly not receded recently. However, we do not expect it to weigh heavily on the US economy in 2019. In our view, Trump’s action towards China has been prompted by the congressional elections which will be held in several weeks’ time. His main intention in implementing the “America first” strategy in a blaze of media publicity is to secure a majority for the Republican Party in both chambers of Congress. The conflict with Mexico was resolved a short while ago, with a new trade agreement negotiated very quickly. At times the chances of a compromise being reached had looked very slim.

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