Global growth appears set to bottom out. However, we expect 2020 to be a year of global growth consolidation than a full-fledged recovery, built on 1) a truce in US-China trade tensions; 2) a turn in the global tech cycle; 3) looser macro policies; and 4) a depreciating USD, which will help add to global liquidity and add to emerging market economies.
We caution that the outlook remains very foggy and appreciate the dangers of a re-escalation of US-China frictions, a worsening slowdown in China’s economy and a global credit crunch.
Finally, 2020 could be a watershed year for monetary policy if the Fed and ECB decide to run their economies hotter than before; or, alternatively, if it becomes plain that monetary policy is on its last legs, 2020 could be the year that fiscal policy takes over as the main tool of global stimulus.
The pace of US economic growth has slowed to just below potential and that is expected to continue through H1 2020. The US-China economic relationship is in flux, and a national election is on the horizon. Uncertainty about economic policy and the business environment generally remains high. Businesses are likely to remain cautious next year, and that will depress investment and overall growth. However, consumer fundamentals remain strong. The likelihood that inflation will pick up to a degree that the Fed would find unwelcomed is low. Following the unusual underperformance of inflation recently, and the associated declines in inflation expectations, the Fed may want to foster a period of “reflation”, and so it will continue to support the expansion. This is likely to keep interest rates, both short- and long-term, near current levels for some time.
China’s GDP growth rate is expected to keep slowing to below 6% next year. While 2019 was set out to be difficult, the worst is not over yet, and 2020 looks set to be yet another tough year. Other than delivering on growth stability, maintaining financial stability will be a key task for Beijing in 2020, as years of stimulus have finally started to weigh on China’s banking sector. China’s growth continues to slow due to reasons such as its worsening fiscal condition, weakening property investment, rising bond defaults, and credit crunches at some local banks in some low-tier cities.
Euro area growth is likely to remain below trend and inflation below target in 2020. There are however, signs of stabilization, which indicates a slow recovery eventually filtering into inflation. With inflation unlikely to approach its target in the near future, the ECB is expected to cut rates by another 10bp in early 2020, marking the end of the easing cycle, but monetary normalization is unlikely to start until late 2021. In the UK, despite the landslide election victory by the conservative party, the economy is unlikely to turnaround quickly enough to prevent a one-off rate cut by the BOE in January. The UK is on track to leave the EU on January 31, but uncertainties will likely linger on its future trading relationship with the EU.
The growth slowdown phase of the economy has almost ended thanks to a rebound in the tech cycle, but remaining structural drags in major overseas economies will likely delay a significant re-acceleration of growth. Underlying stagnation of consumption and persistently weak inflation momentum are likely to sustain expectations of the need for additional monetary easing. With monetary policy effectively in deadlock, however, we think there will be continued support from comparatively proactive fiscal policy, mainly in the form of public works spending.
Domestic credit conditions remain tight, as market concerns in the shadow banking sector have persisted for too long. Thus, we believe India's growth is set to slow further in Q4, delaying the recovery expected by consensus. We expect GDP growth to surprise consensus on the downside again in 2020, at 5.5%. In the near term, while we expect inflation to overshoot the RBI’s 4% target owing to high food price inflation and other supply-side shocks, we see this as a transitory phenomenon. The Reserve Bank of India is likely to ease again in Q2 2020, however the burden to perform the heavy lifting for growth now seems to be shifting to fiscal policies.
There are three high conviction calls in Southeast Asia: Indonesia, Thailand and the Philippines. In Indonesia, with still some uncertainty on the implementation of structural reforms, the macro policy mix in the short term is something to be cautious of. The lack of fiscal support to growth next year could over-burden monetary policy, raising the risk of more policy rate cuts. In Thailand, GDP growth is expected to remain well below potential at 2.7%. In the Philippines, we expect a V-shaped pickup in growth, driven by accelerating public investment spending and strengthening overall domestic demand.
For a more in-depth analysis of our 2020 forecast, read our full outlook here.
Head of Global Macro Research
Chief US Economist
Chief China Economist
Chief UK & Euro Area Economist
Chief Japan Economist
Chief Economist, India and Asia ex-Japan
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