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Global outlook: slow but steady

5 minute read

12 November 2019

By Henk Potts, Senior Investment Strategist

While trade and geopolitical uncertainties are set to buffet the global economy in 2020, is a recession really on the cards?

After years of positive and predictable growth, the outlook for the global economy became far more challenging in 2019. Similarly, economists are increasingly cautious on prospects.

The range of potential culprits for the caution include trade wars, political and social instability in Europe, the structural slowdown in China, rising tensions in the Middle East and Brexit disruption. While recent newsflow suggests the risk of a no-deal Brexit and an escalation of the US-China trade war has diminished, the backdrop remains unstable. A heady mix of uncertainty is likely to persist, maintaining pressure on global growth prospects in 2020.

US-China trade stand-off

Undoubtedly the US-China trade war poses the single biggest risk to the global economy. While the two sides have appeared to edge closer to a mini-pact, we remain circumspect about market expectations of a rapid resolution to the dispute.

A detailed US-China agreement will take years to implement and to monitor compliance levels. America may also turn its attention to other regions. If so, the global economy will have to cope with higher tariffs for longer than was originally envisaged and a more widespread economic impact than first anticipated.

Growth drivers

While plenty of risks face the global economy, there are also a range of key supporting factors. The consumer remains in great shape, helped by historically low unemployment rates; pay growth that is outpacing inflation and tax cuts that have boosted disposable income. The service sector remains resilient and the corporate picture still looks relatively bright.

Central banks have become more accommodative of late and politicians are increasingly considering fiscal support, proving policymakers are willing to act to support growth and extend the cycle. However, policymakers’ effectiveness may be infringed upon by the limited amount of ammunition available to them.

Potential warning signs

There are number of developments that would encourage us to ring the recession alarm bell.  Primarily, a dramatic re-escalation in the trade war developing into further nationalism.

Another warning sign would be if manufacturing and exports weakness filtered through to the services sector and household consumption.  An inability to implement a timely resolution to the Brexit debacle would also have negative implications on sentiment and, in turn, growth prospects.

When assessing the risk of a recession in 2020, remember that economic contractions tend to be caused by a range of factors including shocks, structural imbalances, restrictive monetary policy and irrational exuberance. These, by their very nature, are difficult to predict and often don’t shine through in economic models. However, we will continue to monitor the forward-looking survey data for signs of deterioration, paying particular attention to business confidence and investment levels.

Dull growth, but expansion

We do not anticipate that the global economy will slump into a recession in the near term. That said, global growth is moderating significantly.

We forecast that global growth will nudge up to 3.2% in 2020 from an estimated 3.1% in 2019. This is clearly slower than the 3.9% seen in 2018 and 20-year average of 4.1%, but not disastrous.

For investors looking to navigate through a period of heightened uncertainty, the most proficient approach is through a globally-diversified portfolio.

We forecast that global growth will nudge up to 3.2% in 2020 from an estimated 3.1% in 2019. This is clearly slower than the 3.9% seen in 2018 and 20-year average of 4.1%, but not disastrous.

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