2020 Annual Outlook

Growth in the Slow Lane

In addition to reduced trade tensions between the U.S. and China,
there are several points of support for the world economy.
-- Jack McIntyre, CFA, Portfolio Manager and Anujeet Sareen, CFA, Portfolio Manager
2020: Making Progress, But Still Stuck in the Slow Lane  

As we prepare for 2020, some market participants and investors remain concerned about whether a downturn in U.S. economic conditions could precipitate a global recession. Rather than making a recession call, we instead prefer to highlight the factors that should support the global economy in 2020 and turn the two-year slowdown into a period of slow but sustainable growth. These supportive factors include improving consumer fundamentals, improving economic indicators from emerging markets, impending reform, and the global backdrop of low inflation that has ushered in a wave of global monetary easing. 

 

Global Business Conditions Should Take Cues from Consumers 

Looking at how 2019 unfolded, it’s easy to understand why optimism gave way to pessimism. U.S.-China trade tensions escalated while the Federal Reserve (Fed) neglected to modify policy quickly and expand it broadly enough to offset the domestic consequences of this dispute, which then fed into the global economy. These factors had a profound impact on global business conditions, which took a significant hit in 2019. Both investment spending and business sentiment declined, as shown below: 

 

OECD World Consumer vs. Business Confidence Indexes

January 1985 through September 2019

Source: Haver Analytics. Monetary Policy Stimulus reflects net difference between central banks whose last move was a rate cut, versus those that did not.  Past performance is no guarantee of future results. Indexes are unmanaged and not available for direct investment. Index returns do not include fees or sales changes. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.  

However, the chart also shows that consumers have been globally optimistic, including in the U.S. In 2020, we believe consumer optimism and strong household fundamentals could lead business confidence higher. In particular, the U.S. consumer could determine whether the domestic economy emerged from a mid-cycle slowdown or is headed toward a recession that could spread to the rest of the world. We will be monitoring consumer sentiment and expectations very closely in the U.S. and beyond, to determine whether that continues to buoy household spending, and eventually feed into the business cycle by encouraging companies to increase capital expenditures. 

 

Positive Signs Emerge in Asia

The positive impact that global consumers could have on business conditions has become evident in Asian export activity. Following one of its deepest troughs at the beginning of 2019, Asian export volume rebounded significantly over the past few months despite headwinds from the trade dispute and the resulting drag on China’s economic activity. Even countries with significant ties to the Chinese economy—such as Taiwan, Singapore, and South Korea—took part in this recovery, underscoring the role of consumer demand in the global economy, and how governments are taking steps to preserve household health.   

 

More Countries Are Expected to Implement Reform

Australia is another example of an economy that has significant ties to China. In 2020, we expect to see more countries follow Australia’s lead, by taking a multi-faceted approach to stimulus as a way to buffer the lingering effects of weak economic activity from the prior year. In Australia’s case, the governing Liberal Party has pledged to pursue a pro-growth agenda while the Reserve Bank of Australia eases. Although Australia runs a modest budget surplus, it has some slack to implement reform and fiscal stimulus intended to support households, improve infrastructure, and invest in potentially competitive sectors. Therefore, we expect countries with relatively stronger fiscal and external positions to pursue fiscal stimulus in 2020. Since the efficacy of easier monetary policy from developed market central banks is expected to fade, generating a growth impulse from government reform and fiscal stimulus should become increasingly important in 2020 and beyond. 

 

Global Monetary Easing Should Register in the Economy

Most central banks around the world joined the G3 in 2019 by easing monetary conditions, a trend that should persist in 2020. For its part, the Federal Reserve (Fed) course-corrected three times to address global headwinds and improve domestic business conditions. The effects of these coordinated easing efforts will continue to take time to register in the global economy as shown in the chart below:

 

Global Manufacturing PMI and Monetary Policy Stimulus

Jan 1997 through October 2019

Source: Haver Analytics. Monetary Policy Stimulus reflects net difference between central banks whose last move was a rate cut, versus those that did not. Past performance is no guarantee of future results. Indexes are unmanaged and not available for direct investment. Index returns do not include fees or sales changes. This information is provided for illustrative purposes only and does not reflect the performance of an actual investment.  

The tailwinds of easier monetary conditions should transmit into global economic activity in 2020 and eventually push global manufacturing Purchasing Manager Indices (PMIs) higher. While the chart above shows global PMIs hovering at that crucial “50” mark, emerging market manufacturing and services PMIs have remained expansionary in 2019, helping that broader metric stay in neutral territory. We expect emerging market PMIs will remain strong in 2020 and lend support to developed markets. Similarly, strength from the services sector of the global economy could also offset the slowdown in manufacturing.

This emerging market strength should come from lower policy rates—global short-term rates on a weighted GDP basis should stay around 2% in 2020—targeted reform, and improved external balances, including their current accounts. 

Developed market manufacturing PMIs contracted in 2019, likely dragged down by Germany and the broader eurozone economy, which have been collateral damage in the U.S.-China trade dispute. The regional bloc has exhausted monetary policy and fiscal stimulus is needed. We have previously invoked German and European Commission officials to leverage their twin surpluses to stimulate the regional economy. However, it will be an incredibly high hurdle to convince more member countries and European Commission officials to increase spending to address flagging growth in 2020. 

 

A More Constructive Growth Outlook in 2020

A weak global macro pulse has started to support the world economy. For example, consumer confidence remains high, Asian export volume rebounds, emerging market PMIs remain expansionary, central banks ease in concert, and government budgets account for stimulus. While these factors should bode well for the global economy, the onus will nevertheless be on the U.S. and China to rein in those risk factors that precipitated the broad-based slowdown that started in 2018. We will need to see credible progress in terms of a trade deal, and sound policymaking from the Fed and Chinese authorities. If these factors were to crystallise, we expect that cyclical inflation pressures would remain controlled, U.S. economic growth would level off around 2% and Chinese economic growth would rebound. The biggest risks to this outlook include more policy inaction from the Fed and Chinese authorities, or the onslaught of political volatility related to the U.S. election cycle.  

 

Investment Implications

The slump in Chinese economic activity significantly contributed to global malaise in 2019, as the country attempted to structurally change its economy amidst a trade dispute without apparently implementing enough stimulus. Later in 2020, Chinese policymakers may pivot away from stimulus and refocus on generating organic growth. Meanwhile, emerging markets have run a combination of prescriptive policies to preserve industrial activity and consumer confidence. In aggregate, emerging markets are running an approximate 1% current account surplus on a GDP-weighted basis in spite of a challenging macro backdrop. So long as emerging market central banks continue easing, we expect these improvements to extend into 2020. As economic activity outside the U.S. picks up in 2020, the relative growth differential should narrow and allow the U.S. dollar to weaken more broadly.

 

Additional Outlooks

Clarion Partners
Cautious Optimism Amid Change


ClearBridge Investments
Consumers Hold the Key


EnTrust Global
Looking Beyond the U.S.


Martin Currie
Shifting the Global Balance


QS Investors
Uncertainty on the Horizon


RARE Infrastructure
How Infrastructure Is Evolving


Royce Investment Partners
Positive Signs for Small-Caps
 

Western Asset

Resilient Growth, Despite Risks

 

Emerging markets (EM) are nations with social or business activity in the process of rapid growth and industrialization. These nations are sometimes also referred to as developing or less developed countries.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

G3 refers to the world's top three developed economies: US, Europe and Japan. 

Purchasing Managers Indexes (PMI) measure the manufacturing and services sectors in an economy, based on survey data collected from a representative panel of manufacturing and services firms. PMI greater than 50 indicated economic expansion; below 50, contraction.

Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time. 

current account balance summarizes the flow of goods, services, income and transfer payments into and out of a country 

“Bloc” refers to an association of nations with political or economic interests in common.

The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.

Gross Domestic Product ("GDP") is an economic statistic which measures the market value of all final goods and services produced within a country in a given period of time. 

The OECD Consumer Confidence Index and OECD Business Confidence Index are broadly used economic indicators reflecting consumer and business confidence levels based on surveys conducted by the Organization for Economic Development and Cooperation.

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