Our round-up of major economies; featuring charts and commentary.
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US growth is expected to moderate further in 2020, to around the long-run potential. That further slowing reflects the ongoing direct and indirect impact of tariffs imposed in the second half of 2019.
The consumer remains relatively healthy, with robust balance sheet and favourable income prospects. Business investment is more challenged, however, given the trade uncertainty. While the announcement of a Phase 1 deal with China should ease concerns somewhat, risks remain tilted to the downside.
With growth expected to be around potential, there should be limited upward pressure on core inflation. We expect the Federal Reserve to be on hold in 2020, but with a bias to further easing.
Figure 1: US
Euro zone growth has continued to disappoint in 2019, but at least it has remained positive.
It is hoped that Q3 will prove the low point (+0.1 per cent q/q) and that GDP will revive gently in 2020 back towards the trend pace of between 1 and 1.5 per cent annualised. But that would probably require further positive progress on resolution (or at least reduction) of the trade dispute and a revival in world trade growth.
The euro zone nations depend heavily on exports. Having said that, it is worthwhile noting that domestic demand across Europe continues to be resilient. On current trends, if trade simply stopped being a drag, growth overall would recover satisfactorily. With inflation still stuck at 1 per cent or so, and business sentiment still fragile, the current growth dynamic justifies the relaxed policy stance being adopted by the European Central Bank.
Figure 2: Euro zone
Brexit continues to dominate all aspects of the UK’s economic outlook. The decisive election result in favour of the Conservatives should clear a pathway to an exit from the EU at the end of January 2020 but will not remove all uncertainties.
The spectre of another “cliff-edge” at the end of 2020 still hangs over Britain, as it seems unlikely that all of the details of the future trading relationship between the UK and the EU can be finalised quickly. An extension would be the logical next step but may be politically difficult.
Meanwhile, growth in the UK remains weak and sentiment subdued. Risks are skewed to the downside and with inflation low and set to fall further, the Bank of England is unlikely to hike for some time. A post-election fiscal boost is probable but will not change the underlying picture much.
Figure 3: UK
A phase 1 trade deal with the US will avoid further damage, but existing tariffs will still require continued policy stimulus to put a floor under GDP growth.
We expect total output to grow by less than 6 per cent in 2020, as existing leverage and debt concerns weigh on the corporate sector. CPI is elevated, with the Year of the Pig seeing pork prices lift inflation to nearly 5 per cent, but this should reverse during the new zodiac cycle: the year of the Rat should see gradual rate cuts and some CNY weakness on continued friction on the security, human rights, and technology fronts.
The rest-of-the-world will benefit less than before from Chinese growth, as the state-directed economy focuses more on the domestic side and pursues import-substitution strategies.
Figure 4: China
Export-sensitive Japan has been affected negatively by the global slowdown and negative trade growth.
Q4 will look terrible after the consumption tax hike and October’s damaging typhoon. However, its impact should fade, and the government has added a slew of offsetting measures that should lift growth again, particularly around mid-2020, when the Tokyo Olympics will also boost tourism and consumption.
Yet, even with a stabilising external sector, Japan’s potential growth is limited by a declining population and productivity gains, while the Bank of Japan is reluctant to use more firepower. Prices will be lifted by the tax, but both inflation and real incomes will benefit from free childcare – which can also help female participation and productivity. The recently unveiled fiscal package looks huge, but actual fiscal spending and investment is only a third of the headline number, and will be spread over four years.
Figure 5: Japan
Growth continues to slow in line with expectations with the sharper contraction in Q3 2019 predominantly driven by a fall in net trade.
Looking ahead to 2020, growth is expected to remain near potential. However, the outlook remains significantly tied to the broader trend in global growth and trade.
Consumer spending continues to be the main contributor to growth, supported by a tight labour market and subsequent strong wage growth. A soft landing in the housing market is needed to support the economy, however the Bank of Canada (BoC) will be wary that this needs to be balanced against risks from high levels of household debt.
Debt dynamics make the economy more sensitive to changes in policy, thus constraining the BoC desire to move rates. With inflation well anchored near 2% the BoC is likely to remain on hold and focus more on growth when making policy decisions.
Given risks to the outlook remain on the downside, if monetary policy is to change the balance of probabilities are tilted towards cuts.