Outlook 2020

Outlook 2020: Global economy

Keith Wade

Keith Wade

Chief Economist & Strategist

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After a spell of weaker growth, the world economy looks set to pick up in 2020, extending one of the longest ever periods of expansion. The slowdown this year has led to concerns that the US economy might contract.

We expect a "phase one" deal between the US and China, which was first announced in mid-October. It would hopefully prevent the two countries implementing further tariffs on each other’s exports and potentially reduce those in place.

This would prompt global trade and business investment to strengthen. Activity could then improve in Europe and Japan, as well as the US. We have also upgraded our growth outlook for China.

Trade deal spells brighter days ahead for Europe

The prospect of at least a partial trade deal between the US and China is good news for the large export-driven economies of the eurozone. With many European economies seeing healthy domestic conditions, a rebound in trade could lead to a positive outcome for the region in 2020. We have raised our forecast to 1.2%, from 0.9%.

We see new European Central Bank (ECB) President Christine Lagarde staying the course set by predecessor Mario Draghi, with scope for another rate cut in the new year. Lagarde is among a growing chorus calling for “fiscal stimulus” measures, tax cuts and infrastructure spending, to boost growth.

We are somewhat sceptical on this front. Those economies with most room to increase spending, Germany and the Netherlands notably, are inherently wedded to limited spending. They tend to plan decades ahead and are predominantly concerned with paying for the care and retirement of ageing populations. We see only limited support action from these governments.

A fiscal expansion looks more likely in the UK. The two main parties are vying to outspend each other. UK economic data has been distorted by “Brexit effects” such as stockpiling. The UK economy, led by the household sector, has coped well, but is likely to remain subdued and the Bank of England on hold.

Better outlook for emerging market economies too

We see an acceleration for most emerging markets, as trade recovers and inflation remains limited, to allow for some further moderate rate cuts. Government measures look likely to play a key role.

We see positive prospects for Brazil, as pension reforms should boost confidence, encouraging economic activity. By contrast, India is beset by challenges, particularly with its banks. We will hopefully see an improvement on the back of government action. Russia’s leaders remain focused on economic stability and steady, but low growth.

It is a significant year for China. In 2010, the government pledged to double the size of the economy and average incomes by 2020. To meet these aims the authorities will at least need to ensure growth stays at the symbolic 6% level. Further moderate policy easing is possible.

Low US interest rates another pillar of support

The benefits of lower interest rates – which makes borrowing money easier – will also be felt. Monetary conditions overall, taking into account central bank interest rates, bond yields and the US dollar, are the loosest for nearly a decade. This makes it easier for households and businesses to borrow and for money to flow around the global system. We are already seeing the effect of this in the US housing market, where mortgage applications and housebuilding have picked up sharply.

Despite a better growth outlook, global inflation remains relatively stable. We expect US core inflation (measuring price increases, but excluding volatile items like food and energy) will finish 2019 at 2.5%. This is above the Federal Reserve’s (Fed) 2% target, but the central bank will likely tolerate an overshoot, given lingering concerns of deflation. Additionally, the risk that oil prices drive inflation higher is low. We think with this level of inflation, and growth below the long-term trend, the Fed could cut rates again in April.

Growth and inflation more evenly balanced

Broadly, we now see the balance of risks between growth and inflation as more evenly spread. Underpinned by the strength of the US labour market, there remains a risk of wages accelerating by more than expected in our central view. The rising employment rate results in rising wages. This should be positive for consumption, but could prompt the Fed to tighten policy to cool the economy and dampen inflationary pressures.

In September, we saw a higher risk of weaker growth combined with higher inflation, we now see a healthier balance between growth and inflation risks. For example, alongside stronger wages households could respond to lower interest rates by borrowing and spending more, with the US consumer once more becoming a driver of global growth. This could have an inflationary impact, an outcome markets seem to be paying little attention to. On the downside, a failure for the US and China to strike a phase one trade deal could send global activity into a downturn.


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