Global Economic Outlook: 2020
Global recession unlikely in 2020 but growth will continue to be highly lackluster and economic environment tumultuous
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Global growth will continue to be highly lacklustre in 2020
After the global economy is slated to grow at its slowest pace in a decade in 2019 - largely as a result of US-China trade war dampening business confidence, investment, manufacturing and trade worldwide - global growth will continue to be highly lackluster and possibly lower than IMF’s global growth forecast (3.4 per cent) for 2020 (they have projected global growth of 3 per cent for 2019). This is because China’s slowing growth is likely to pose a substantial drag on the global economy next year. Further, given the gargantuan overhang of debt over the Chinese economy, exchange rate concerns, risk of property prices heating up and fiscal deficit well above target, any further policy stimulus in China will probably be a modest one only - which is unlikely to counter slowing global economic growth and rev up growth in this country in 2020.
Moreover, the year 2020 is likely to be an economically tumultuous year, as disruptive forces are sweeping across the global economy at a time when monetary policy in the developed world is seeming increasingly impotent to shore up growth, heightened policy uncertainty is pummeling global trade and investments, public and private debt globally have spiralled to unsustainable levels and are exerting downward pressure on growth - along with the risk of Donald Trump ramping up his anti-globalization agenda, due to the impending 2020 US Presidential election and impeachment probe. Most importantly,even if a ‘phase one’ trade-related agreement between the US and China does take place, it is likely to be unstable, short-term and fragile, as there are many contentious structural issues that won’t be resolved and given that this trade war is actually more than just economics and trade (it’s about global economic and technological dominance), a long-term comprehensive trade deal is unlikely. As a result, the global slump in confidence, investments and manufacturing will continue.
Asia (ex-Japan) to drive global growth and five countries are most vulnerable to a downturn
Asia (ex-Japan), led by India and buoyed by fiscal and monetary stimulus, will continue to drive the global economy. But this region’s growth will continue to remain highly subdued. The countries most vulnerable to a marked economic downturn in 2020 are Germany and Japan (due to their highly trade-dependent economies and strong integration into global supply chains), China (principally due to US-China trade-related disputes) and the UK (due to Brexit related issues, fractious political environment and uncertainty about trade relations with the EU).
Global recession or a marked plunge in global growth unlikely in 2020
A global recession or a marked plunge in global growth in 2020 is likely to be prevented by super-dovish central banks (both in developed and emerging economies), modest fiscal stimulus in China, the eurozone and in several Asian economies, and fairly resilient consumer spending in both developed and emerging economies. However, most major developed economies (the US, eurozone, the UK and Japan) will grow more slowly in 2020, relative to 2019 (for reasons stated later in this article). Emerging markets, which are unlikely to decouple from developed economies in general, will continue to grow well below potential (though economic momentum in several large emerging economies such as India, Indonesia, Brazil, Russia and Chile should improve next year). The prospects of Hong Kong, which is already in a recession, will continue to be gloomy, Singapore’s economic outlook for 2020 is tepid amid persistent trade tensions and weakness in the global manufacturing sector (a highly expansionary fiscal stimulus is possible in Budget 2020) and South Korea may witness marginal uptick in growth next year (though trade tensions with Japan, slowing external demand and US-China trade disputes will pose threats to its growth in 2020).
US Economy likely to slow down further next year but consumers will shield the economy
Even though the US economy slowed in 2019 Q3 (growing at an annualized rate of 1.9 per cent, according to Commerce Department, compared to 2 per cent in the previous quarter), it is still growing and seems broadly on track with consumer confidence remaining high, consumer spending growth still healthy (although slowing - rising by 2.9 per cent annualized rate in 2019 Q3, compared to 4.6 per cent in the previous quarter), labor market yet strong, with hiring remaining resilient in October (though the softening manufacturing sector has already witnessed job losses) - decent wage increases (even though wage growth is stalling), improvement in the housing market (aided by falling mortgage rates), rise in real incomes, corporate fundamentals yet solid and S&P 500 touching a record high.
Having stated the above, I expect the US economy to grow more slowly over the coming quarters of 2020. This is because the contraction in business investment (it contracted for the second consecutive quarter in 2019Q3 - falling by 3 per cent) is likely to continue over the coming quarters (due to weakness in global growth, trade policy-induced uncertainty, US-China trade war, US-EU trade disputes, uncertainty about the outcome of 2020 US Presidential election and its impact on tax, trade and regulatory policies, and firms’ concerns about earnings growth prospects and debt servicing at a time of trade tensions, policy uncertainty and massive rise in US corporate debt), wage growth is stalling and slump in business investment will possibly spill over to the labor market in the coming quarters (via slower hiring and resultant moderation in income growth and consumer confidence) - with obvious downside implications for consumer spending growth in 2020 (I expect moderate deceleration in consumer spending next year, as low household debt and high savings rate should provide some support to consumer spending). Further, growth in 2020 will be constrained by winding down of fiscal stimulus.
Moreover, unexpected decline in US retail sales in September (the first decline in seven months) raises fears that weakness in the manufacturing sector could increasingly spread to the wider economy and adversely impact the consumer side of the economy over the coming months. Already, economic weakness seems to be spreading from manufacturing to the services sector in the US - the services PMI reading for October suggests that services sector growth continues to be very weak. My US GDP growth forecast for 2019 and 2020 is 2.2 per cent and 1.6 per cent respectively.
Chinese Economy - growth likely to drop below 6 per cent but consumption will support growth
With the Chinese economy growing by 6 per cent year-on-year in the third quarter (the weakest growth rate in almost three decades), factory activity shrinking for the sixth consecutive month in October (according to the official PMI), large drop in services sector activity (the services sector accounts for more than 50 per cent of the Chinese economy), falling imports (reflecting cooling domestic demand and sluggish investment) and slump in exports, as a result of the protracted US-China trade war (two-thirds of Chinese exports to the US still face stringent tariffs), it seems that the Chinese economy is in need of more economic stimulus to shore up growth and prevent job losses in 2020. More stimulus, in my estimation, could come in as early as December.
What is worrying is that weakness in the manufacturing sector is now spreading to the services sector (which has been duly supported by rising wages and spending power of the Chinese consumers in recent years). Further, going forward, despite the policy measures announced in August 2019 to boost consumption in China, consumption spending growth (particularly on big-ticket items such as consumer durables, automobiles among others) is likely to witness moderation in the coming quarters of 2020, as real disposable income growth (a leading indicator of consumption) has moderated, wage growth is subdued, downturn in China’s manufacturing and export sectors have adversely impacted hiring (these two sectors account for a significant share of workers’ salaries in China), businesses are showing reluctance to hire, household debt to disposable income has risen sharply, returns on wealth management products are falling and slump in manufacturing investment could further slow income growth over the coming quarters.
Despite these aforesaid downside factors, analysis of consumption, recent tax cuts - China reduced its income tax rates in August for the first time since 2011 - wage growth and the services sector leads me to conclude that though consumer spending will moderate over 2020, yet it will prove to be fairly resilient and the largest source of demand growth, which in turn should prevent overall growth from decelerating sharply.
Over 2020, Chinese manufacturing, exports and investment will remain under pressure with private investment being subdued - at a time when gargantuan levels of debt (exceeding 300 per cent of GDP - according to IIF) is already weighing on China’s economic growth and financial stability. Consequently, more stimulus will be required, in order to put a floor undergrowth and also because the impact of past stimulus till now has been muted. It is likely that the stimulus will take the form of additional public spending on infrastructure - the Chinese government has doubled the value of government-approved large-scale infrastructure projects this year, relative to last year, to stabilize the economy - further reductions in the required reserve ratio - maybe by another 50-100 bps in the near future - and more tax cuts to support consumer spending. My Chinese GDP growth forecast for 2019 and 2020 is 6 per cent and 5.7 per cent respectively.
Eurozone - likely to lose further momentum and could grow more slowly in 2020
Eurozone, according to preliminary data, grew by 0.2 per cent in 2019 Q3, which was better than expected. However, going forward, growth is likely to lose further momentum. Germany, Eurozone’s largest economy, is teetering on the verge of a recession as a result of a continued downturn in manufacturing and subdued global automobile sales. Fortunately, Eurozone’s strong labour market, pick up in wage growth momentum and resilient domestic demand have prevented this economy from going into a recession. But what is worrying is that latest data on bank lending to firms in the Eurozone suggests that the economic slowdown is spreading and broad-based, business activity in this region remains stuck in a rut - the eurozone’s October composite PMI, which is a sound guide to the Eurozone’s health, remains barely in expansionary territory, GDP growth is stalling and German economic activity continues its slump in 2019 Q4 (the domestic consumption-driven French economy and Spain are a striking contrast).
Going forward, as the economic slowdown spreads to the services sector, things are going to get rather difficult for the Eurozone over the coming months. Further, Eurozone’s export dependence makes it highly vulnerable to the US-China trade war, economic slowdown in China and the US (as both are important trading partners of the Eurozone), Brexit, escalation of US-EU trade disputes and state of emerging markets - exports to EM’s account for nearly 10 per cent of Eurozone’s GDP. Economic pessimism, as reflected by October’s ESI reading, is growing in the Eurozone and job growth in all probability will slow down over the coming months. This is turn should result in slower consumption growth in 2020. Moreover, I expect only a modest fiscal stimulus in 2020 (Germany and Netherlands can afford it), which is unlikely to have much of an impact on this region’s growth (French and Italian economies cannot afford a fiscal stimulus). My GDP growth forecast for the Eurozone for 2019 and 2020 is 1.2 per cent and 1 per cent respectively.
UK economy - economic outlook shrouded by political and economic uncertainty
While the UK economy will possibly have avoided entering a recession in 2019 Q3, the highly disconcerting October PMI readings of the services (that accounts for around 80 per cent of the UK economy), manufacturing and construction sectors, slowing consumer spending growth (despite rising wages), soft housing market, labour market demonstrating signs of weakening and October’s consumer sentiment indicator reflecting that consumers are broadly and more pessimistic seems to suggest that this economy (which is already buffeted by weak global growth, a fractious political environment, declining business investment and continued uncertainty about UK’s future trading relations with the EU and the world in general) is set to slow further in 2020 - even under the assumption of an ‘orderly Brexit.’ My UK GDP growth forecast for 2019 and 2020 is 1.2 per cent and 0.9 per cent respectively.
Even though UK’s economic outlook for 2020 is significantly shrouded by political and economic uncertainty, a slowing global economy, the dismal outlook for business investment and uncertainty about trading relations, I don’t expect it to go into a recession next year. This is because even if the labour market seems to be weakening, it yet remains strong by historical standards, wage growth remains healthy and inflation is likely to be below wage growth next year - with a stronger currency (GBP) helping to keep inflation within Bank of England’s inflation target. As a result, though consumer spending growth is expected to decelerate, relative to 2019, it should, along with more supportive fiscal policy and a possible rate cut by the Bank of England next year (current bank rate is 0.75 per cent), prop up the UK economy in 2020.
Japan should escape a recession in 2020, but growth likely to decelerate markedly
As far as Japan is concerned, even though industrial output rebounded in September, a slowdown in global demand and the US-China trade war have pummeled its manufacturing sector and increasingly exerted downward pressure on this highly export-reliant economy. Fortunately, Japan’s domestic demand has remained robust. However, the economic outlook for 2020 gives rise to concern. This is because I expect domestic demand to decelerate sharply, as consumer spending will probably slump over the coming months (due to rise in sales tax from 8 per cent to 10 per cent on October 1, 2019) and Bank of Japan’s latest “Tankan” survey showed that business confidence among large Japanese manufacturers has worsened to its lowest level in six years - which is a reflection of rising global risks taking its toll on this export-led economy.
Even though the Bank of Japan (BOJ) opted to keep its monetary policy on hold at its policy meeting in October 2019, more stimulus measures are likely in the near future - given the presence of significant downside risks to growth and inflation over 2020 emanating from weakness in manufacturing confidence, subdued wage growth, slowing Chinese economy, strong possibility of deceleration in consumer spending growth after the sales tax hike, US-China trade war and global economic slowdown. BOJ is already maintaining a negative rate policy and is conducting quantitative and credit easing, so I am rather sceptical about the potency of further monetary easing measures with reference to its ability to prop up growth. However, fiscal policy should come to the rescue, as the Japanese government in October signalled a fiscal-stimulus boost to the economy, in case it slows after the consumption tax hike (i.e. sales tax hike). My Japanese GDP growth forecast for 2019 and 2020 is 0.9 per cent and 0.3 per cent respectively.
Asia (ex-Japan) - growth should pick up marginally in 2020, led by India
The Chinese economic slowdown has had a ripple effect from Seoul to Singapore, as many economies in this region prioritize trade links with China. Consequently, this region has been witnessing slowing economic momentum this year (particularly in the first half of 2019 - driven by a pronounced downturn in fixed investment and exports). Going forward, in 2020, growth in this region should pick up marginally - led by India (where growth has plunged to a six-year low). Recent monetary, fiscal and structural policy efforts will result in a gradual pick-up in economic activity in India over the coming months. However, its growth will remain highly subdued. My India GDP forecast for this fiscal year and the next is 5.8 per cent and 6.8 per cent respectively. In this region, ASEAN’s economic momentum, in particular, is vulnerable to US-China trade-related tensions and a slowing Chinese economy in 2020 - even though accommodative fiscal and monetary policies and robust domestic demand should be supportive of growth next year. China was the largest trading partner for ASEAN in 2018 - with $587.7 billion of trade (according to official data) - a record high. More rate cuts are expected in Indonesia, Thailand, Philippines and Malaysia in 2020 and fiscal support will continue in several economies.
Middle-East 2020 economic outlook particularly worrying
Among emerging economies, I am particularly worried above the 2020 economic outlook of the Middle-east as a whole (though three major economies - Saudi Arabia, UAE and Qatar - should grow more rapidly in 2020, relative to this year - principally due to ongoing reforms to boost non-oil sector growth, continuing economic diversification and due fiscal support in these three economies among other reasons - such as Dubai Expo 2020 in UAE, planned infrastructure spending related to FIFA world cup in 2022 in Qatar, subsidy reforms and prospects of improving domestic demand in Saudi Arabia), due to simmering geopolitical tensions, major contraction in Iran, trade-related tensions, high debt and unemployment, and subdued oil price outlook - even with the possibility of OPEC resorting to more cutbacks in oil production. Considering global oil demand and supply dynamics, barring a major geopolitical shock, I expect oil prices to be in the range of US$ 57-65 per barrel in 2020.
Global Financial Markets - several downside risks
Global financial markets have been on a roller-coaster ride in recent months, due to uncertainty surrounding US-China trade war, elevated geopolitical risks and fears of an impending global recession. They will remain highly vulnerable to huge corrections in 2020 in the event of any economic, geopolitical and liquidity shocks.
An important factor that is likely to have downside implications for global financial markets (and the banking sector) in 2020 is corporate earnings growth of non-financial companies - which is set to slow in the US, Eurozone, the UK, Japan and China. This is because of strong possibility of weaker consumer spending in all major developed economies and China over the next year - 2020 (which will adversely affect emerging market exports), weak and uncertain global trade outlook, lackluster productivity growth, firm’s general lack of pricing power, slower FDI growth globally and an economic milieu that will continue to seriously inhibit business investment in these economies in the near future.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.