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Why investors can expect resilience – not recession

While global growth is likely to remain modest in 2020, a recession continues to look unlikely. Investors should keep a keen eye on the US-China trade war, major central banks' monetary policy, corporate debt, and the US presidential elections – among the issues that could shape the global economy's performance in the year ahead. Below we round up some of the main takeaways from the Credit Suisse Investment Outlook 2020: Resilience after all.

Over the past year, we have witnessed a significant slump in global manufacturing and trade. While the ongoing trade spat between the USA and China certainly contributed to the drop, the trade war is not the only culprit. The domestic slowdown in China due to more cautious household spending and restrained credit growth, as well as and weakness in German auto sales exacerbated the slump. Faced with a highly uncertain environment, global corporate capital expenditure also slowed significantly.

Manufacturing to drive path to recovery

We expect the slump in manufacturing to bottom out in the first half of 2020. As the slowdown in manufacturing abates, the risk of it “infecting” the services sector should also diminish. The easing of policy by the US Federal Reserve (Fed) over the course of 2019 has helped boost credit, especially to US households. This support should remain in place in 2020 – although we do not expect further rate cuts – and should bolster home purchases as well as other consumer spending.

In Europe, we expect fiscal policy to ease gradually, which should support the growth rate in the region. However, recovery will hinge on finding at least a partial resolution to the trade war. Reducing tariffs would improve profitability and sentiment in both the USA and China, which should help reignite capital spending.

Main macro risks stem from trade war

The key risk remains that the damage done by the trade war carries into 2020. Even in the event of a trade deal, it seems likely that China's economy will continue to slow somewhat, at least in the first half of 2020. High mortgage debt combined with greater job uncertainty are likely to hold back consumer spending, while policy makers will remain cautious regarding stimulus measures. Slowing growth in China will continue to limit the recovery potential of its main trading partners in the region.

The global economy did come close to recession in 2019 – measured by the slowdown in global trade, for instance – which suggests that even limited shocks, whether geopolitical or economic in nature, could turn a downturn into something more serious.

However, a major setback to global growth seems unlikely in our view, given continued accommodative monetary policy, ample bank credit in most regions, as well as moderate oil prices. Apart from the global trade tensions, we see no obvious shocks that would trigger a recession. We believe that the global economy and risk assets should continue to show resilience despite headwinds.