Dodging recession

Growth: We expect sluggish gross domestic product (GDP) growth for the US economy in 2020 (1.8%), accompanied by elevated recession risks (20%–30% probability in the next 12 months), and rising core inflation – at least at the beginning of the year. While job growth will moderate, rising labor costs will continue to weigh on corporate profits. Good news could come from a recovery in manufacturing activity if the USA and China reduced tariffs. However, their full elimination appears unlikely and the trade war could potentially escalate in other areas. If the USA, for example, implemented tariffs on European automobiles and Europe retaliated, European producers and US consumers would be hurt. 

What to watch: After cutting rates three times in 2019, our base case is for the Fed to remain on hold. Nevertheless, another cut is more likely than a hike in 2020, and the Federal Reserve could increase asset purchases. While a potential rebound in manufacturing, as well as labor shortages that boost inflation would, in principle, argue for rate hikes, any rate move close to the election seems very unlikely.


Cautious consumers

Growth: The government is likely to pare its growth target to 5.9%, and actual numbers could drop somewhat below that objective. Apart from the lingering impact of US tariffs, the burden of real estate debt, job insecurity, as well as weakness in local financial markets will likely restrain domestic consumer spending. The limited efficiency of credit allocation remains a key concern, and the manufacturing sector will remain under pressure due to continued overcapacity and competitive disadvantages in some sectors. However, assuming a de-escalation of the trade dispute with the USA and moderate stimulus measures, the decline in economic growth will be limited.

What to watch: At the end of the first quarter, the Chinese government could announce added fiscal spending for 2020. With more fiscal room, authorities are likely to rely less on special purpose bonds and more on direct spending to support growth, at least until there is greater visibility with regard to the 2020 US election and future US trade policy. Unless the trade war escalates, the Chinese authorities are likely to limit any depreciation of the CNY.


Further fiscal support

Growth: We expect GDP growth of 1%. A de-escalation of the USChina trade dispute would reduce the drag on the Eurozone, and Germany in particular, helping to end the contraction of exports and industrial production. Given the resilience of domestic demand and the Eurozone labor market throughout 2019, the removal of that headwind should allow Eurozone GDP growth to gradually improve. Resilient credit growth should also support the ongoing economic expansion. Monetary policy is unlikely to ease further within the Eurozone, but the European Central Bank (ECB) decisions taken in September 2019 (rate cut and renewed asset purchases) have already created a slight tailwind.

What to watch: New leadership of the European Union (EU) and ECB could bring new political impetus. More concretely, 2020 might well mark the first year of Eurozone fiscal expansion in over a decade. Furthermore, we could well see a more generous interpretation of the Stability and Growth Pact by the European Commission, which would allow Italy and other countries to further ease fiscal policy. A continued trade war and its potential expansion to Europe poses the greatest risk, as well as a no-deal Brexit. 


Olympic boost

Growth: The Japanese economy is likely to slow somewhat in 2020 (GDP growth of 0.4%), but the expected turn in global manufacturing should limit the slowdown. The consumption tax hike of October 2019 may also continue to exert a drag. However, assuming there is no global recession, the Japanese economy will be able to overcome domestic headwinds. Meanwhile, the 2020 Summer Olympics will provide a tailwind by boosting inbound tourism. Public investment is also likely to remain strong in the first half of the year. 

What to watch: Monetary policy will remain loose in 2020 and beyond. In fact, the Bank of Japan (BoJ) could potentially raise its inflation target. The consumption tax hike will be offset to some extent by added government spending. Given its sensitivity to global trade and the Chinese economy, the outcome of the trade war and the evolution of demand in China are important as well. New trade agreements with the EU and the USA provide some long-term upside.


Still all about Brexit

Growth: Assuming a smooth Brexit process, our central expectation is that the UK grows somewhat more strongly in 2020 than in 2019. A Conservative majority would allow the UK to leave the European Union (EU) with a deal, while a Labour government (in a majority or coalition) would open the door to a second referendum. A hung parliament could produce deadlock and more uncertainty. While a nodeal Brexit is unlikely, in our view, such a scenario would cause a significant recession, with a decline in real GDP of 1% to 2% even if the Bank of England (BoE) eases monetary policy and the government loosens fiscal policy in response. 

What to watch: The BoE’s wait-and-watch approach is likely to continue while Brexit uncertainty remains high. If the UK leaves the EU with a deal or if Brexit is canceled, there would be considerable upside to corporate investment and overall growth. The BoE might then begin hiking interest rates in the course of 2020.


Trade holds key to recovery

Growth: We expect moderate GDP growth in 2020 (of 1.4%) in light of the still subdued global backdrop. Domestic demand should remain supported by continued immigration, robust employment and slightly higher wages. Pharmaceuticals exports are likely to remain on a clear upward trend. The mechanical and electrical engineering (MEM) sector will likely remain under pressure due to still weak demand from key export markets, including Germany and China.  

What to watch: The Swiss National Bank (SNB) will do what it can to prevent CHF appreciation. While a rate cut is not our base case, it could come to pass if the global economy remains weaker than expected and other central banks cut rates. US tariffs on pharma exports or the classification of Switzerland as a currency manipulator pose some risk. Increased geopolitical tensions would increase the risk of renewed safe haven flows into the CHF.

Asian EM (ex-China)

Prospects hinge on trade war

Growth: The outlook for the more advanced countries of North Asia, i.e. South Korea and Taiwan, remains subdued due to weakness in Chinese trade, with growth of just over 2%. The outlook for Hong Kong will depend strongly on local political developments. Meanwhile, economic growth remains far stronger in much of Southeast Asia, which has more catch-up potential and is less integrated into China-based supply chains.

Some countries, most prominently Vietnam, stand to benefit as production continues to shift in their direction. Singapore suffered a significant setback in 2019 in part due to the slowdown in global and China-oriented trade; a slight rebound to around 1.7% seems likely in 2020 if trade tensions abate. Growth in India is likely to remain high in absolute terms at around 6%, but well below potential due to the ongoing weakness in the banking and real estate sectors.  

What to watch: A de-escalation of the US-China trade war would significantly benefit the countries closely tied into China-based supply chains. Even more important is the evolution of domestic demand in China and its impact on imports from the region. In India, which is much less dependent on global trade, domestic financial and monetary stability are key to a successful recovery.


Eye on household debt

Growth: While low growth in household income, weaker housing market conditions and elevated household debt weighed on consumption in 2019, an increase in public spending supported economic growth. Infrastructure investment should continue to provide support in 2020. After a relatively subdued 2019, we expect Australia’s economy to pick up with an estimated growth rate of 2.8%. 

What to watch: Although house prices have already corrected to some extent, housing affordability is still low. Real estate thus remains high on the political agenda and further housing supply reforms are very likely. The Reserve Bank of Australia (RBA) lowered its interest rate in several increments in 2019 to support the economy and could continue to do so in 2020. At the same time, financial supervision will remain in focus given the stability risks related to real estate.


Coping with setbacks

Growth: Turkey appears to have emerged from recession in Q2 2019 and is likely to achieve growth of 2%–3% in 2020. The headline inflation rate, projected at 12% for end-2019, could slow further after Q1 2020. Growth in Russia is likely to remain anemic at only around 1%–2% due to unfavorable demographics, bureaucratic burdens and low efficiency of public investment.

Weak metals prices as well as structural issues such as labor market rigidities and a lack of public investment will continue to hold back South Africa. A number of Eastern European economies have suffered setbacks due to their close ties with the German auto industry, but growth is likely to remain reasonably robust given strong domestic demand and these countries’ strong competitive position in other areas of trade.

What to watch: In Turkey, policy mismanagement remains the key risk against the backdrop of President Recep Tayyip Erdogan’s target for single-digit interest rates and real GDP growth of 5% next year. The changing domestic political landscape and ongoing (albeit muted) geopolitical risks also complicate the outlook, in our view. In Russia, low inflation (for the previously mentioned reasons) should pave the way for lower interest rates.

A pick-up in Germany would benefit Eastern Europe. There are significant downside inflation risks building in South Africa. If they come to pass, South Africa will probably be one of a very few countries with large potential for policy easing in 2020. Investors will also be closely watching to see if Moody’s downgrades its rating for South Africa after the 2020 budget.

Latin America

Bottoming out

Growth: Brazil and Mexico, the region’s two largest economies, showed only marginally positive growth in 2019. This was in part due to the global manufacturing slowdown, but domestic policy uncertainty played an even bigger role. The outlook for Brazil has improved, however, with the approval of pension reform, which will strengthen long-term fiscal stability and should be positive for privatizations and a continuation of the fiscal consolidation process. We expect GDP growth of 2.7% in 2020. In Mexico, growth should also improve somewhat (1.6% in 2020), partly in response to monetary policy easing.

Meanwhile, some domestic risks have abated, including uncertainty over the 2020 budget and financing pressures on state-owned oil company Pemex. That said, it is questionable whether added government investment in the oil sector will produce adequate returns given declining global oil prices. 

What to watch: In Mexico, other reforms such as tax reform look more likely despite political tensions. In addition, US congressional approval of the new free trade agreement known as the United States-Mexico-Canada Agreement (USMCA) would boost confidence, but this is not a given. Inflation in Mexico has declined to the central bank’s 3% target, and should remain fairly stable at below 4% in Brazil.

In summary

Our regional views amount to a mixed global growth picture. US as well as Chinese growth is likely to be somewhat lower than in 2019. At the same time, the expected recovery in the Eurozone and select EM should offset some of the softness. 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. However, 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.