Global economic growth is set to increase by 3.3% in 2020 from 2.9% in 2019, with risks remaining to the downside
The global economy is expected to grow by 3.3% in 2020 from 2.9% in 2019, on the back of positive US-China trade developments and accommodative financial conditions. A minimum prerequisite for favorable global economic conditions would be the sequential quarterly annualized growth in 2020 to remain near 2% in the US and 6% in China. In our view, these growth rates are attainable.
On the positive side of the ledger, Chinese and euro area economic data are improving, albeit from low levels, with Citigroup Economic Surprise Indices (CESIs) turning decisively positive (see graph below). Note that Chinese high-frequency economic indicators for December were strong across the board, with production and retail sales surpassing consensus estimates (see Economics). Moreover, fiscal policy is expected to be slightly expansionary in the US, China and the euro area.
Furthermore, the US-China Phase 1 trade deal may lead to an improvement in global growth momentum, on top of distributional gains particularly for US producers who supply to China. Indeed, China has pledged to increase its imports of goods and services from the US by $200bn over the next two years, compared with a level of $186bn in 2017 (see Economics).
On the other hand, several global manufacturing PMI indicators for the past four months have remained at the lower end of their 2018/2019 range (e.g. Global PMI manufacturing troughed at 49.4 in July 2019). Moreover, there are implementation risks regarding the US/China trade deal, while there is a possibility of an escalation in US conflicts with the rest of the world (e.g. the car-tariff threat). Note that the German car industry, in addition to its large exposure to the US (car exports amount to +0.7% of German GDP), is also challenged by idiosyncratic issues including emission regulations and the switch to EVs. As the German export-oriented manufacturing sector has driven the GDP slowdown from 3.5% yoy in Q4:2017 to 0.5% yoy in Q4:2019 and a strong rebound is far from certain in the near term, the resilience of the domestic-oriented services sector will be tested.
Moreover, in a US election year (November), voting intentions and the policy mix following the election outcome could significantly impact risk markets. According to Real Clear Politics, Biden and Sanders share first place with 20% in the Iowa Democratic Presidential Caucuses (due on February 3rd), albeit Biden leads by 8 points over Sanders at the national level. Risk markets could react defensively should a candidate in favor of higher regulation, spending and corporate taxes, secure the Democratic nomination (Sanders, Warren).
Investor attention will also turn to the ECB’s first meeting of the year. Policy is expected to remain unchanged (MRO: 0%, DFR:-0.5% and net asset purchases at €20/bn per month). The meeting will also see the kick-off of the ECB’s strategic review, which is expected to be concluded by end-2020. The review will likely include a detailed analysis of inflation and its subdued performance in recent years, the toolkit of existing and potential policy instruments (interest rates, forward guidance, asset purchases, and yield-curve control) and the inflation target itself (a numerical target of 2% instead of “below, but close to 2%” or a tolerance range of inflation around 2%). Albeit the quarterly macroeconomic forecasts are due on March, indications of how the Governing Council assesses GDP, inflation and the balance of risks (currently deemed to be on the downside) will be also closely monitored amid early signs of stabilization in economic momentum and increasing price pressures.