In this Issue:

US Economy’s Moderately Strong Growth and Low Inflation Suggest Further Slow-but-Steady Monetary Tightening

We believe the US economy’s current combination of moderately strong growth and low inflation is likely to see a further slow-but-steady tightening of monetary policy, following the confirmation by the US Federal Reserve (Fed) at its December meeting of a widely expected interest-rate rise. Regarding a Republican package of tax cuts passed on December 20, at this stage we are cautious about assigning too much significance to such measures’ potential impact on economic activity and monetary policy. They could help to keep the US economy’s growth rate above its long-term trend during 2018, depending on the speed of implementation. Nevertheless, we think the possible effects beyond a short-term boost are likely to be somewhat limited in terms of magnitude and scope.

Widespread Global Economic Upturn, but Still Little Sign of Inflationary Pressures

The pattern of a strong cyclical upturn in the global economy combined with subdued inflation looks set to continue for some time, in our view. Nevertheless, we believe increasing demand and a diminishing pool of labor are likely to create meaningful pricing pressures at some point. With the influence of factors like demographics and disruptive technological change on economic fundamentals not yet fully understood, it is difficult to predict the catalysts for such a shift to occur. Central banks have also struggled to understand the economic forces at play. Consequently, they seemingly remain inclined to run the risk of falling behind the inflationary curve rather than getting ahead of it. Given the momentum of the global economy, and with interest rates in many countries still not far from their historic lows, we think the risks for both inflation and interest rates look tilted to the upside.

Eurozone Set to Maintain Robust Growth, Supported by Global Economy and ECB Policy

We believe the current robust economic conditions in the eurozone are likely to continue, with a number of factors providing the basis for further expansion. The global economic environment is supportive, and monetary policy looks set to add further to domestic activity, with the European Central Bank (ECB) seemingly awaiting signs that inflation is beginning to move closer to its target of around 2% before moving to a less accommodative stance. Even the region’s politics appeared more cohesive than they have for some time, with the strength of the German economy to some extent dampening the uncertainty over the formation of the country’s next government.

US Economy’s Moderately Strong Growth and Low Inflation Suggest Further Slow-but-Steady Monetary Tightening

We believe the US economy’s current combination of moderately strong growth and low inflation is likely to see a further slow-but-steady tightening of monetary policy, following the confirmation by the Fed at its December meeting of a widely expected interest-rate rise. Regarding a Republican package of tax cuts passed on December 20, at this stage we are cautious about assigning too much significance to such measures’ potential impact on economic activity and monetary policy. They could help to keep the US economy’s growth rate above its long-term trend during 2018, depending on the speed of implementation. Nevertheless, we think the possible effects beyond a short-term boost are likely to be somewhat limited in terms of magnitude and scope.