2019 will be better than expected

After a number of years of effort, Japan is also achieving a modest level of inflation. We think that CPI inflation in Japan will grow by 1.4% in calendar 2018. This should rise slightly to 1.7% in 2019. Japanese inflation is still below its targeted level of 2.0%. Although this inflation target has been in place since 2013, the target level of inflation has never yet been achieved. However, positive inflation in Japan is reducing real interest rates. This provides further support for growth in the Japanese economy.

Australia

In 2017, Australia produced a through the year growth of 2.4%. Although this was a healthy performance by the standard of other wealthy economies, it was below Australia's long term performance. An increase in the terms of trade during 2017 produced stronger growth in the Australian economy in 2018. We think that the Australian economy will grow by 3.2% in 2018. This growth should accelerate to 3.3% in 2019.

In spite of a better economic performance in 2018, inflation is likely to rise by only 2.0%. We think it will rise by 2.3% in 2019. This low level of inflation is brought about by Australian unemployment being above the natural rate of unemployment of 5%. This means that unemployment has not fallen to a level where a tightness in the labour market will generate upward pressure in real wages.

Only when real wages begin to increase will this put upward pressure on inflation. Only when this inflation rises toward the upper end of the RBA range of 2% to 3% will the RBA react by increasing interest rates. We are firmly of the belief that there will be no increases in Australian interest rates in calendar 2019.

Figure 2: Asian Economic Perspective

SOURCE: Morgans

China

Chinese economic growth in 2018 was marked by a dramatic acceleration in the manufacture of steel. Chinese steel production rose to an all time record high of 81.42 million tonnes per month in July 2018. This meant that production was up by slightly more than 20 million tonnes per month from the level of 61.1 million tonnes per month in February 2017. This increase was the biggest annual increase in absolute terms since the expansion of Chinese steel production in 2009 which served to lift the Chinese economy out of the global recession. The Chinese economy seems now to be driven by strong domestic factors. One of these is demand for infrastructure associated with the domestic building industry. The second is the demand for infrastructure with the Belt and Road Project.

Uncertainly has prevailed over the renegotiation of the Chinese trade position with the United States. However, at the close of 2018, it is apparent that the Chinese government and the US government are making considerable efforts to come to an agreement over

trade in early 2019. We think the initial agreement will include a reduction in Chinese import tariffs on motor vehicles. This will be a great and positive step forward. However, major issues on Chinese use of US intellectual property remain to be negotiated. We think these negotiations will keep both US and Chinese negotiators busy for a few more years to come.

India