Investment Outlook 2020 Global economy

Global economy

Moderate growth, but no recession

We expect only sluggish global growth in 2020 of 2.5%, almost unchanged from 2019, but a recession continues to look unlikely given supportive macro policies. De-escalation on the trade war front will be key.

Over the past year, we have witnessed a significant slump in global manufacturing and trade, with global export volumes dropping by about 2% from the high of 2018, the biggest decline in recent decades except for periods of recession.

More than trade

The USA’s imposition of tariffs on China and China’s retaliation undoubtedly contributed to this slump, but the domestic slowdown in China – due to more cautious households and restrained credit growth – played a key role as well. Weak- ness in German auto sales exacerbated the manufacturing slump. As a result of heightened uncertainty, global corporate capital expenditure (capex) slowed significantly as well.

Meanwhile, the services sector lost some steam but continued to grow in most countries. With the services sector being the largest employer in developed countries as well as many emerging markets, demand for labor continued to grow and wages have been rising, albeit gradually. As a result, consumer sentiment and spending remained relatively robust.

Path to recovery in 2020

We expect the slump in manufacturing to bottom out in the first half of 2020, not least because of a natural inventory cycle. 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 for instance bolster home purchases as well as other consumer spending.

Interest rate cuts by the Fed have also eased constraints on emerging markets dependent on USD funding. Central banks in a number of countries should be able to lower interest rates further, not least because inflation is declining. In Europe, we expect fiscal policy to ease gradually, which should support the growth rate in the region. However, a key to recovery will be at least a partial resolution to the trade war. A reduction in tariffs would improve profitability and sentiment in both the USA and China, which should help reignite capital spending.

Main macro risks

The key risk remains that the damage done by the trade war carries into 2020. Other geopolitical risks, especially the potential for a flare-up in the Middle East, remain in place but are less likely to materialize. In particular, we do not expect the global economy to be hit by an oil-price shock but rather expect oil prices to stay under pressure due to excess supply.

Even in the event of a trade deal, it seems likely that China’s economy will continue to slow somewhat, at least in H1 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. An escalation of tensions in Hong Kong would pose downside risks.

Meanwhile, the USA is likely to face an unusually polarized election, which could negatively affect business and consumer sentiment. A further risk is that higher-than-expected inflation would raise fears of stagflation. In such a case, the Fed would be constrained in its actions. Bond yields might then rise substantially, triggering a general tightening of financial conditions.

On the following pages, we look at the outlook for 2020 on a country-by-country and regional basis, focusing on the base case as well as risks.