"The theme that is loud and clear in our 2020 outlook is uncertainty," TD Securities said in its global forecast for the year, citing the U.S.-China trade conflict and the upcoming U.S. presidential election. "Although our base-case suggests no deterioration in trade uncertainty, we expect unresolved structural issues to keep uncertainty simmering at still unfavorable levels, which would see the remaining tariffs still shave about 0.3 [percentage point] off of U.S. growth in 2020, while supporting inflation by about 0.4 [percentage point]."
UBS and TD Securities both predict 3.0% growth after a 3.1% expansion in 2019. The International Monetary Fund expects growth to pick up to 3.4% in 2020, but even this figure is a 0.2-percentage-point downgrade from April. Wells Fargo Securities Economic Group is expecting growth to remain unchanged year over year at 3.0%, and the Organisation for Economic Co-operation and Development expects world GDP growth to stay level at 2.9%. S&P Global Ratings expects growth to increase slightly to 3.3% compared with 2019's 3.2%. Global growth in 2017 was near 4%.
Central banks' easing cycle in force
There were 38 interest rate cuts across the world during the first nine months of 2019, Hermes Investment Management Senior Economist Silvia Dall'Angelo said, citing data from the Bank for International Settlements. But doubts surrounding the effectiveness of central banks' policies have stacked up, said Dall'Angelo, who noted that it takes about 18 months for monetary easing to take its full effect on the economy and pointed to uncertainty around trade as a potential constraint on the effectiveness of monetary policy.
Heading into the new year, Rabobank and TD Securities expect the Fed and the European Central Bank to cut rates further in 2020, and TD Securities also anticipates rate cuts by the Bank of Canada, Reserve Bank of New Zealand and Reserve Bank of Australia. In addition, TD Securities expects Australia to initiate quantitative easing in 2020.
The Fed, which was unanimous in its decision to keep rates unchanged in its December meeting following three rate cuts in 2019, offered a reassuring assessment of the strength of the economy and signaled that it could pause its rate cuts for the foreseeable future.
While a decisive victory by the Conservative Party in the U.K. general election clears up some clouds of uncertainty around Brexit, there are still a number of policy concerns that are yet to be addressed.
The risk of the U.K. concluding the transition period without a deal is low, according to PIMCO Executive Vice President Ketish Pothalingam and Vice President Peder Beck-Friis. "If the trade negotiations fail, we expect the two sides to extend the transition period — possibly by amending the Withdrawal Treaty at the end of 2020 — or by implementing temporary side deals, smoothing the transition into WTO trading terms," they said.
Following reports that U.K. Prime Minister Boris Johnson does not plan to extend a Brexit transition period, fears of a no-deal Brexit at the end of 2020 have been renewed. However, the odds of no-deal Brexit remain at approximately 20% in 2020, according to TD Securities. PIMCO sees roughly 50-50 odds of an extension of the deadline or a limited Brexit agreement, with little risk of a no-deal exit.
US trade, election
Uncertainty still looms over U.S.-China trade talks — an issue that has driven market volatility and global economic slowdown — despite the "phase one" deal, which includes plans to cancel certain U.S. tariffs on Chinese goods while bolstering Chinese purchases of U.S. goods and services, as well as measures that address U.S. concerns on Chinese intellectual property practices.
Despite the breakthrough, Northern Trust's Chief Investment Strategist Jim McDonald expects trade tensions to continue to be a headwind to growth in 2020. "We think this will continue to be a headwind to growth and risk-taking as we do not expect a meaningful solution in the foreseeable future," McDonald noted. However, Wells Fargo said in its 2020 annual economic outlook that trade prospects are not likely to get "meaningfully"worse in the year ahead.
The U.S. election could prove to be another source of uncertainty amid tentative relief around the U.S.-China trade conflict. The outcome of the impeachment proceedings against U.S. President Donald Trump could energize either base, with a Republican sweep leading to tax cuts for individuals and corporations while a Democratic win might bump up taxes for high-income earners and businesses.
The fixed-income giant PIMCO in a paper released Jan. 7 predicted just 1.5% to 2% growth in the U.S. in 2020, down from an estimate of 2.3% in 2019. PIMCO saw downside in a potential Democratic electoral victory, noting the potential for higher taxes.
- Hassan Aftab