In this Issue:

Respectable US Growth Underpinned by Constructive Conditions, but Potential Risks Ahead

We see the US economy as maintaining its current path of respectable but not overly robust growth. Underlying fundamentals and economic momentum remain constructive, while we do not foresee an acceleration in growth to a level that would swiftly create inflationary pressures. On a medium-term basis, however, we do have concerns that the potential risks to this late economic-cycle expansion are increasing. The transition of leadership at the US Federal Reserve (Fed) has been smoothly handled so far, and we expect the Fed to continue its data-dependent path on monetary policy at its upcoming March 21 meeting and beyond. But the new Fed chair, Jay Powell, has taken stewardship of a very different economy than the one faced by his predecessors. We believe it is important to remember the possibility that the path he is inclined to pursue could be equally distinct.

Global Economy Maintains Cyclical Upturn, but Has Yet to Produce Meaningful Inflation

Globally, the economic picture remains positive, in our view, with expansion on track across all the major regions. This outlook could be threatened if the tariffs adopted by US President Donald Trump spark a full-scale trade war, although we see this as a low-probability scenario. More likely is a continuation of the current cyclical upturn in growth, with inflation lagging due to structural forces like demographics and technology. We think most central banks will be content to monitor developments in their respective economies, rather than look to get ahead of them.

ECB Adjusts Messaging, Though Likely to Maintain Dovish Stance for Some Time

While we think it unwise to place too much emphasis on a single month’s data, we believe the slight dip seen in growth indicators in February could signal that the eurozone is approaching its maximum potential rate of expansion. Given the strength of the activity, the European Central Bank’s (ECB’s) removal of an easing bias from its messaging was not surprising. However, our view remains that any major announcement from the central bank on its quantitative easing (QE) program could be some months off. With the ECB’s forecasts still suggesting only a very gradual upward path for inflation in coming years, we would not be surprised to see a decision in the summer to extend QE beyond the current commitment of September, perhaps with a greater focus on corporate bonds.

Respectable Growth Underpinned by Constructive Conditions, but Potential Risks Ahead

We see the US economy as maintaining its current path of respectable but not overly robust growth. Underlying fundamentals and economic momentum remain constructive, while we do not foresee an acceleration in growth to a level that would swiftly create inflationary pressures, despite a likely short-term boost from the recent tax policy changes. On a medium-term basis, however, we do have concerns that the potential risks to this late economic-cycle expansion are increasing, among them trade frictions, deteriorating fiscal conditions and overall political uncertainty. The transition of leadership at the Fed has been smoothly handled so far, and we expect the Fed to continue its data-dependent path on monetary policy at its upcoming March 21 meeting and beyond. But the new Fed chair, Jay Powell, has taken stewardship of a very different economy than the one faced by his predecessors. We believe it is important to remember the possibility that the path he is inclined to pursue could be equally distinct.