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Global Economic Outlook

Global Economic Outlook - December 2019

The U.K. election and U.S.-China preliminary deal removed some immediate risks, but uncertainty will remain in the forecast.

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  • Hard Yards Ahead

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Geo-political risks like the trade war and Brexit dominated headlines and kept markets on edge for most of this year. However, last week’s events offered much-needed relief to investors. After two years of talks, the U.S. and China apparently reached a “phase one” agreement on trade. Brexit is now a step closer to resolution, but the process will not end with passage of the withdrawal agreement. The real labor on both fronts lies ahead.  

Because of this, the outlook for the global economy, while positive, remains uncertain. Key trade issues between the U.S. and China remain unresolved. New trade tensions are emerging between the U.S. and its allies. China, the factory of the world, is slowing down in response to external and internal challenges. The eurozone’s economic fortunes look tenuous. Unrest in several parts of the world could also break badly next year. 

Overall, we expect economic activity to remain subdued but sustained in major economies. Here are our views on the world’s major economic blocks.

United States

  • The Federal Open Market Committee’s meeting in December yielded no rate changes, stable forward guidance and a subdued market reaction. After a busy year, we welcome a steadier outlook for short-term rates. The Fed’s attention will now turn to stabilizing overnight funding markets and reconsidering its inflation targeting framework.
  • Employment continues to surprise to the upside, with 266,000 jobs created in November and upward revisions to prior months. Benefits of the expansion are accruing to workers at all levels. Low unemployment, steady wage gains and stable inflation have made consumers the foundation for continued economic growth. Meanwhile, a move away from tariff escalation bodes well for restoring business confidence and investment.

Eurozone

  • The eurozone economy continues to grow at a weak but stable pace, defying fears of a sharp slowdown. The small recent improvement in manufacturing figures is encouraging, but slow service activity suggests some spillover from the heavier to lighter industries. We expect growth in the eurozone to stabilize around current levels, but there is less hope of a meaningful pick-up, especially without a coordinated fiscal boost by economies that possess room to ease. 
  • In line with broad expectations, the European Central Bank (ECB) held rates steady at President Christine Lagarde’s debut policy meeting while emphasizing the need for a “new European policy mix.” With the ECB running out of room to ease and some of the external risks like Brexit fading, we believe policy rates will remain on hold through 2020.

United Kingdom                                                              

  • As anticipated, Prime Minister Boris Johnson secured a working majority in the last week’s elections. The outcome will help the U.K. government move forward on January 31 with a Brexit agreement. But the real challenge will lie in preparing the country for its new relationship with the EU, which will entail defining new trade terms, new customs procedures and new regulations. It may be difficult to achieve all of this without extending the transition period beyond December 31, 2020. If work is not completed by this latter deadline, a “no-deal” departure is still a possibility.
  • Brexit-related uncertainty and weaker global growth continue to weigh on the economy: real gross domestic product (GDP) is growing at its slowest pace since early 2010. But progress on Brexit should clear some economic obstacles. Though the next Bank of England (BoE) governor could face pressure to shore up the economy, we do not see a need for the BoE to act next year.  

Japan

  • The Japanese economy continues to struggle amid external uncertainties and decelerating business investments. However, a $120 billion economic stimulus should offset the impact of the recent consumption tax hike.    
  • At its December 18-19 meeting, the Bank of Japan (BoJ) is likely to maintain its current monetary policy stance and may upgrade its economic forecasts on the back of stimulus measures announced by the government. The BoJ is expected to remain on hold through 2020 unless the yen strengthens notably (not in our base case).

China

  • The U.S. and China have agreed to a limited trade deal. The U.S. not only deferred its threatened December 15 tariffs but will also reduce the tax rate of its prior round of tariffs by half. In return, China has committed to increased purchases of agricultural, energy and other goods in 2020. Though a positive outcome, the deal fails to address the core issues that led to the current dispute. At best, “phase one” is just the first installment of a series.   
  • Chinese economic activity continues to moderate as weak investment growth and sluggish exports weigh on growth momentum. Consumer spending also slowed recently. Although improved sentiment around trade talks will help reduce the downside risks, domestic imbalances (including high levels of debt) and weaker external demand will continue to weigh on the economy. As a result, policymakers will likely continue to deploy stimulus measures to underpin growth.

Global Economic Forecast – December 2019

GEO 12/17/19 Chart

Carl R. Tannenbaum

Executive Vice President and Chief Economist

Ryan James Boyle

Vice President, Senior Economist

Vaibhav Tandon

Vice President, Economist

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