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Global growth weakened considerably in 2019, falling from 3.2%
in 2018 to of 2.6; the main culprits, the trade wars and weakening
growth in China. In response, many central banks began to loosen
monetary policy. However, as global exporters adjusted to the new
world of higher tariffs, the impacts of the trade war on real GDP
growth turned out to be smaller than expected. By the end of the
year, many of the IHS Markit purchasing managers' indexes
(especially in manufacturing) began to stabilize and show small
gains. Moreover, while any major progress on the trade war will
likely have to wait until after the 2020 US elections, an
escalation in hostilities—significant enough to do major
damage—also seems unlikely.
What's coming in 2020
1) The US economy will expand 2.1%
Based on estimates about sustainable growth in the labor force
and productivity, we assess the trend (or potential) growth in the
US economy to be around 2.0%. Real GDP growth was above trend from
2017 to 2019 (averaging 2.5% on a calendar-year basis) thanks to
fiscal stimulus. However, with the effects of this stimulus wearing
off, growth is returning to trend. Second- and third-quarter growth
rates were 2.0% and 2.1%, respectively (at a seasonally adjusted
annual rate). The run-up to the 2020 presidential election could
provide some policy surprises (both positive and negative), which
could affect the outlook.
2) Europe's expansion stabilizes
The slump in eurozone growth in 2019 was alarming, with some
large economies, notably Germany and Italy, coming perilously close
to recession. Nevertheless, there are some signs that the worst may
be over, and we expect eurozone growth to stabilize at around 0.9%
in 2020. Meanwhile the results of the UK election suggest that
while the worst of the Brexit uncertainty may be over, there is
still a hard slog ahead, with growth dropping from 1.3% in 2019 to
0.5% in 2020.
3) Japan's post-tax-hike growth stumble will be
cushioned by more stimulus
Japan's real GDP growth rate accelerated from 0.3% in 2018 to an
estimated 1.1% in 2019. However, fourth-quarter growth is expected
to turn negative as a result of the hike in the sales tax from 8%
to 10% at the beginning of October. In response, the Abe government
announced a larger-than-expected $120 billion, 15-month fiscal
package, which will neutralize much of the negative effects of the
sales tax hike. Consequently, after falling to 0.3% in 2020,
Japanese real GDP growth is projected to recover to 0.5% in
2021.
4) China's growth rate will fall below 6.0% for the
first time since1990
While it is tempting to blame much of the recent slowdown on the
US-China trade war, the decade-long deceleration is the result of
both structural and cyclical factors: an aging population and a
sharp drop-off in productivity growth mean that potential growth in
China is lower now than a decade ago. We predict China's growth
rate will slide even further, to 5.7% in 2020 and 5.6% in 2021,
unless the government puts in place a more aggressive stimulus
program.
5) Emerging markets will continue to tread
water
While China's growth rate has been a key factor in declining
emerging markets GDP, emerging markets also faced two other stiff
headwinds: lackluster expansions in the developed world and falling
commodity prices. Recoveries in the developed world are predicted
to remain fragile in the next few years, while commodity prices are
expected to slide, at least in the near term. These, along with the
simmering trade war and the continued decline in China's rate of
expansion, mean that there is very little scope for growth in the
emerging world to rise much—if at all—from current low
rates. Additionally, the record debt level in the emerging world is
a growing concern.
6) Commodity prices will trend down
The push-pull forces in commodity markets remained in full force
during 2019. While the focus since early 2018 has been on slowing
demand growth, production growth also slowed across 2019, with
market conditions tightening in many industries. This improvement
in fundamentals will gradually assert itself in the year ahead.
After softening in the first half, prices will stabilize or, for
some commodities, push slightly higher in the second half of
2020.
7) Inflation will remain subdued
Most of the recent swings in world inflation were due to
volatility in the rate of price increases, with swings in the
prices of oil and other commodities also a factor. There is early
evidence that the underlying rates of price and wage inflation may
be creeping up in the developed world, but the chances of a major
"breakout" are remote—global inflation in 2020 is only expected
to be 2.7%.
8) The global monetary easing cycle will probably come
to an end
As growth faded in 2019, the Fed and other central banks enacted
monetary policy easing. Signs of solid growth in the United States
suggest that the Fed may not feel the need for further "insurance"
cuts. In fact, IHS Markit believes that there is a better than
50/50 chance that the Fed will raise rates once at the end of 2020
and again in 2021. While the challenges facing the ECB are more
complex, the recently strong opposition to negative interest rates
may imply that any further easing will proceed cautiously.
9) The US dollar will rise a little more
The US economy has been growing faster than most other developed
economies and interest-rate differentials between the United
States, on the one hand, and Europe and Japan, on the other, favor
dollar-denominated assets. In addition, the greenback enjoys
safe-haven status - along with the Japanese yen and the Swiss franc
- meaning that when investors get jittery, they tend to pile into
US bonds and stocks. Ironically, the escalation of the trade war
has exacerbated this phenomenon—thus undermining attempts to
improve the competitiveness of US companies by imposing tariffs on
non-US suppliers. Going forward, these dynamics are likely to stay
in place, but ease a little. We expect the US dollar to climb
another 3% over the next two years, before beginning a long and
gentle retreat.
10) Despite historically high levels of policy
uncertainty, recession is still not the most likely scenario in
2020
The risks facing the global economy remain daunting: in the near
term, the biggest threat is either an escalation of the US-China
trade conflict or its spread to other parts of the world, notably
Europe. Another potential for a policy mistake is the hesitation on
the part of many governments, especially in the eurozone, to
provide more fiscal stimulus. This could become a serious problem
the next time growth falters. In the medium term, the high and
rising corporate debt levels in both developed and emerging markets
are a major threat to the current expansion, when (if) interest
rates begin to rise.
Want to see how how accurate we were in 2019? Download our Top
10 for 2019 to see what actually unfolded.
