Page 14 - Taking Stock 22 Summer 2019

Summer 2019 Taking Stock Themes and strategies for 2019 CHINA TO SLOW FURTHER China growth will also slow further, re ecting ongoing structural change, deleveraging and the trade dispute with the US. In large part, the slowdown in the Chinese economy re ects the continued transition to a more advanced service-oriented economy. Against this backdrop, we expect the authorities to deploy further scal stimulus to manage the pace of the slowdown and to offset the negative impacts of the trade dispute. Contained in ationary pressures also allows monetary policy to become more supportive. Furthermore, while we believe there are strong incentives for the US to end the dispute sooner rather than later, there are equally strong incentives for China to facilitate a negotiated settlement. INFLATION AND MONETARY POLICY In ationary pressures remain generally benign. Only in the US is core in ation in line with the central banks mandate. But even in the US there is currently no sign of an acceleration in in ationary pressures. One of the easier calls of 2018 was that while US growth remained strong, the labour market continued to tighten and the target Fed funds rate remained below current estimate of the neutral rate, the US Federal Reserve would continue to tighten. Interest rate decisions would then become more nuanced as the target rate got closer to neutral. Our view has been that once neutral was in sight, the Fed could well pause the rate hiking cycle. We expect a pause in 2019 and that pause could come sooner rather than later. That does not necessarily mean the rate hiking cycle is over, but decisions now become more data dependent. Indeed, expect a further two hikes this year, in line with current Fed projections. Meanwhile, in Europe, having ended its quantitative easing programme at the end of 2018, the European Central Bank is expected to remain largely on the sidelines in 2019. That re ects the slowdown in growth and continued below-target in ation. 14