Risks recede: Growth on a better trajectory

As 2020 starts to unfold, Michael Grady (Senior Economist & Strategist) summarises our House View and the global outlook for economic growth.

2 minute read

Having declined for the past 18 months, global growth is expected to reach a low point at the end of 2019, before gradually improving over the course of 2020.

While we do not expect growth to rise above potential through 2020, there is a slightly better growth outlook than we had previously expected. That said, in the context of “mid-cycle” growth recoveries, it would be considered modest.

But for asset markets, perhaps more significant than the improvement to the growth outlook is the view that the probability of a severe downturn or recession in 2020 has receded. This reflects a more constructive near-term view on the trade dispute between the United States and China.

At the time of writing, the text of a “Phase 1” deal between the US and China had been agreed by both sides. That included the US cancelling 15 per cent tariffs on about US$150bn of Chinese goods due to come into effect on December 15 and halving the tariff rate to 7.5 per cent on goods worth about US$120bn which came into effect in September (while tariff of 25 per cent on around US$250bn in Chinese imports remains in place). In exchange, the Chinese also cancelled tariffs that were due to be implemented on December 15 and agreed to substantially increase their imports of US agricultural, energy and other goods and services over the next two years, as well as tighten laws on technology transfer and intellectual property rights.

As we saw through 2019, any truce in the trade war could prove to be fragile

The agreement of a Phase 1 deal marks the first time that tariff rates have been reduced between the two economies since the dispute began in 2018. Should this truce persist, it is expected to improve sentiment globally, reversing the sharp slowing in business investment seen across many major economies. It should also prevent the past weakness in the manufacturing sector (which is very sensitive to developments in international trade) spreading more widely into the much larger services sector.

However, as we saw through 2019, any truce in the trade war could prove to be fragile, with the potential for any number of factors related to the geopolitical and economic relationship a potential trigger for re-escalation. Moreover, we continue to expect strategic competition between China and the US will be an important factor in global economic developments for many years to come, irrespective of who occupies the White House. Alongside the recent de-escalation in trade tensions, there was also a material easing in global financial conditions in 2019.

Inflationary pressures, which have been muted, should remain contained

With growth expected to remain below potential in 2020, inflationary pressures, which have been muted, should also remain contained. That makes it highly unlikely we will see the major central banks tightening policy during 2020. However, the likelihood there will be a further easing in policy is also limited, particularly for those economies that are close to their effective lower bound.

All in all, we have a moderately positive outlook for risk assets in 2020 thanks to improving growth prospects and the fact that downside risks from the trade dispute appear to be receding.

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