It has been a challenging year for the global economy in 2019, and 2020 is not shaping up to be much easier. Several factors are combining to restrain the performance of the global economy. The most pronounced area of weakness has been the industrial sector, with industrial output in contraction territory for many key economies during recent months, including Canada, the Eurozone, Japan, and the United Kingdom.
One of the key factors contributing to the industrial downturn has been the extended and persistent escalation of trade tensions between China and the United State. The longer the industrial sector remains under pressure, the greater we believe the risk of a spillover of weakness into the consumer and services sectors.
With monetary policy settings in most major economies already aggressively easy and fiscal policy seemingly unlikely to loosen much, the outlook remains for steady and subdued economic growth. We forecast that economic growth in most foreign economies will remain modest over the next two years.
We project global GDP growth will be 3.0% in 2019, which would be the slowest pace of growth since the global recession of 2008 and 2009. For 2020, we do not expect any firming in activity, but rather expect global GDP growth to hold steady at 3.0%. We expect the global economy to bottom out around the first quarter of the year, with growth recovering thereafter. However, the pace of this recovery will be relatively slow and, perhaps most importantly, it will be spread unevenly across regions.
We see Eurozone GDP growth at 1.0% in 2020, down slightly from 1.1% in 2019. Meanwhile, despite the recent rise in underlying inflation, inflation expectations remain subdued and the ECB’s inflation target remains a long way off at this point. Accordingly, we expect the ECB to cut its deposit rate an additional 10 bps to -0.60% in Q1-2020.
For Japan, we expect GDP growth of only 0.5% in 2020 compared to 1.0% in 2019. The consumption tax increase that went into effect in October in Japan will further lower GDP growth in 2020. In 2020, growth in investment spending in many foreign economies will also remain sluggish as long as trade tensions between the United States and China continue to linger.
Emerging Market Economies (EMEs) remain challenged on a number of fronts. Although the low inflation environment has enabled policymakers to react by injecting stimulus (lower policy rates, increased fiscal spending), idiosyncratic challenges and the potential for an escalation in trade tensions threaten their outlook.
Growth in the EME group is expected to bottom out at 3.9% in 2019, rising to 4.6% in 2020. Emerging and Developing Asia remains the main engine of the world economy, but growth is softening gradually with the structural slowdown in China. Output in the region is expected to grow at 5.9% this year and at 6.0% in 2020. In China, the effects of escalating tariffs and weakening external demand have exacerbated the slowdown associated with needed regulatory strengthening to rein in the accumulation of debt.
Downside risks: In 2019, the tariff pass-through effect for consumers has been limited, but that was by design. Initially consumers were shielded, but now we are seeing price effects. Any further escalation of the ongoing trade conflict between the US and its major trading partners, including China and the EU, risks more damage to confidence and goods inflation. Higher prices for consumer goods would erode growth in real income that could exert headwinds on growth in consumer spending.
There are also uncertainties related to the November 2020 US election to consider. Could the polarized nature of American politics today and the wide range of potential policy outcomes cause consumers and businesses to take a cautious approach to spending in 2020?
The outlook in most other economies would brighten if trade tensions between the United States and China subside and, conversely, the outlook would darken if tensions increase further. The Brexit process continues to cast a cloud of uncertainty over the U.K. economy as well as the European Union. A Chinese crackdown in Hong Kong, should one occur, could also impart a negative shock to global growth prospects. To summarize, in the United States, we do not anticipate an economic recession, but the signs of an aging cycle are increasing.
Out years: So where do we go from here? The fundamentals continue to fall into place for better global economic conditions despite near-term uneven performance. The inputs to our calculations have become less volatile over the past year though this may not last long. While our estimates call for historically modest capital market returns we fully appreciate the journey the markets will take is truly uncertain and that volatility will be on the rise as the upward trajectory of global growth fluctuates in the early part of this next ten year span and the directional change in interest rate regimes heads south or moves sideways led by the United States. Low volatility in US equity markets and stretched valuations are not likely to last forever. Trade-related economic uncertainty remains the main downside risk facing the global economy in the next few years.
For the second half of the coming decade, it is more difficult to predict the cyclical ups and downs of the economy; rather, we assume that GDP will stay at its maximum sustainable level following years of underperformance in the back half of the first decade of this century. With that in mind, US real GDP should grow at an average rate of 2.25% a year between 2020 and 2029. That pace is slower than the average GDP growth rate since 1950.
United States: The US economy has continued to plug along, but has pulled back from the robust pace of 2018. Gross domestic product rose at a 2.1% annual rate in the third quarter of 2019, down from a 2.9% rate for 2018 as a whole.
Even as growth shifts to a lower gear, the economy appears to be moving forward at a fairly solid pace. This resiliency is perhaps best reflected in the labour market, which continues to defy expectations and generate sturdy payroll growth, record low unemployment and steadily improving wages.
The consumers remain the linchpin of US growth. Solid job, wage and income gains explain the persistence in elevated consumer confidence. Household spending has also received a notable boost from one factor that was not anticipated at the beginning of 2019 – lower interest rates.
The Federal Reserve has cut interest rates three times in 2019 on worries that weakness in trade, business investment and manufacturing could derail US growth by triggering cutbacks in spending and hiring.
In our view, trade policy uncertainties which have weighed on investment spending, are not likely to dissipate anytime soon. Although the United States and China very well agreed to a Phase I trade deal, we are skeptical that the two sides will come to agreement on a comprehensive deal that returns tariffs to their pre-trade war levels, at least not in the foreseeable future. Consequently, we believe that growth in investment spending in the United States will remain weak.
Consumer spending on goods and services plus housing form the key pillars of the US outlook that foresees the economy expanding 2.0% in 2020, a slight cooldown from 2.3% in 2019. Underlying this view is that the labour market should continue to improve, absorbing more and more workers while wage growth will hold at fairly robust levels. Adding low interest rates will give all the ingredients for household spending to rise at a sustainable rate in 2020. In contrast, business investment will be less supportive of the outlook.
Our outlook for global growth over the next ten years is somewhat similar to last year. This is because of the lower structural economic growth rate now envisioned for China. The three main reasons for this lower growth profile for China include a decline in fixed asset investment, an economic shift away from production sectors of their economy in favor of service sector jobs and an aging population. Deleveraging will also play an important role in China’s expected growth path in the years ahead. Our Bangladesh at higher than 8% growth has become one of the hightest growth rate in the world, this will continue in the coming years.
Over the next decade, the Eurozone must not only re-establish fiscal sustainability and competitiveness in peripheral economies – which tends to reduce investment and thus create a demand gap for a few years – but it will face unfavorable demographic dynamics. Europe’s potential growth should be hindered somewhat by the Brexit issue as well as a shrinking labour pool and migration, notwithstanding recent migration. On the other hand, there is potential for increased capital stock and total factor productivity to rise due to higher business investment.
The writer is a politician, columnist
and presently Director General,
Bangladesh Foundation for
Development Research.