2019 Outlook: Global fixed income

Gauging the ripple effects of softening economic growth

Dec 10, 2018 | Rob Waldner

Key takeaways

  • In the US, we believe peak levels of growth are behind us and expect to see slowing in the second half of 2019.
  • Outside the US, there are also signs of softening growth.
  • Inflation is likely to increase somewhat, but we do not believe that wage inflation will be significantly passed through to consumer prices in 2019.

Global macro
In the US, we believe peak levels of growth are behind us, although we expect annual growth of around 2.75% to persist through the first half of 2019 before slowing. Fiscal stimulus is still having a positive effect on growth, but will likely wane in the second half of 2019. In addition, the positive financial tailwinds that have been driving the economy may turn more neutral as monetary policy continues to tighten. Therefore, while consumer spending will likely be additive to growth in the first half, as the boost from tax cuts winds down, the question is how much will the consumer want to spend thereafter? Consumption has grown at an unsustainably high level, in our view, over the last several quarters, driven by stronger consumer confidence and tax cuts. A meaningful slowdown in consumption could have negative implications for broader growth. These effects mean that risks to economic growth are higher in late 2019 than they have been in previous points in the cycle.

Inflation is likely to increase somewhat in 2019, supported by tariffs on goods prices. Aside from tariff-driven inflation, pressures are likely to be more subdued. However, labor prices are likely to continue their slow rise as employment markets tighten. We do not believe that wage inflation will be significantly passed through to consumer prices in 2019.

 

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