What recession? Pessimism recedes for global economy in 2020.

Category: News

Last year, stock traders and economists widely predicted a U.S. recession in 2020 or certainly by 2021. The risk isn’t totally gone, but perspectives have grown more optimistic lately. 

The improved outlook, as the world economy enters 2020, offers promise for everyone from workers, benefiting from a tight labor market, to investors, who enjoyed a sparkling 2019 and look forward to solid stock returns in 2020. It could also have political implications, since strong economies tend to benefit political incumbents seeking reelection. This year that includes President Donald Trump.

For the United States, many forecasters now believe growth will remain positive, with the pace slackening to a low in the first quarter or half and then beginning to improve. According to this view, global growth will follow a similar path, as fears of tighter monetary policies and a U.S.-China trade war have eased.

“We all were worried” in 2019, says Michael Gapen, chief U.S. economist at Barclays Investment Bank. Even now, “we don’t see a lot of catalysts for a major pickup in growth…. But our global growth outlook is still stronger.”

A nuanced optimism has crept into the stock markets and forecasts about the world economy.

Where traders and economists once predicted a U.S. recession in 2020 or certainly by 2021, many now believe instead that growth will remain positive this year, with the pace slackening to a low in the first quarter or half and then chugging forward at a moderate rate. According to this view, global growth will follow a similar path. 

That outlook suggests good prospects for everyone from workers, benefiting from a tight labor market, to investors, who enjoyed a sparkling 2019 and look forward to solid stock returns in 2020. It could also have political implications, since strong economies tend to benefit political incumbents seeking reelection. This year that includes President Donald Trump.

“We all were worried” in 2019, says Michael Gapen, chief U.S. economist at Barclays Investment Bank. The U.S.-China trade war was escalating. Job growth was slowing in the service sector. Even now, “we don’t see a lot of catalysts for a major pickup in growth. … But our global growth outlook is still stronger.”

Behind this shift in outlook is the resolution ​– or expected resolution ​– of four key uncertainties that weighed on markets during much of 2019: a “phase one” U.S.-China trade deal, a replacement for the North American Free Trade Agreement (NAFTA), Brexit, and monetary policy for the leading central banks. With paths becoming clearer for all four, the crystal ball for 2020 appears a little less foggy, giving businesses more confidence to invest in new products and factories.

“The global economy seems to have dodged a recession,” says Nariman Behravesh, chief economist of IHS Markit, in a recent report. Last summer, the business information provider pegged the risks of a 2020 recession at 1 in 3; it now puts it at only 1 in 5.

Perhaps the biggest sigh of relief came in December when the United States and China said they would sign a deal this month that puts at least a temporary stop to their tit-for-tat trade war. Instead of tariff increases on Chinese goods, which Mr. Trump had threatened to institute Dec. 15, he and President Xi Jinping have agreed to a pact, set to be signed Jan. 15, that rolls back some tariffs on both sides and includes Chinese pledges to buy more American goods, take various steps to protect intellectual property, and open its financial sector to foreigners.

The phase one deal represents more of a cease-fire than a breakthrough, analysts say. Wall Street has even coined a term for it: peak tariffs. The idea is that neither side will raise tariff levels as negotiations continue for the next several months and perhaps through the November election, as President Trump will not want to upset markets.

The deal “will provide a little bit of a floor that will probably help us see some bounce back of private investment in China,” says Scott Kennedy, a China expert at the Center for Strategic and International Studies, a Washington think tank. But “we should not expect that this phase one deal will fundamentally calm things down.”

Another key resolution is the passage of the U.S.-Mexico-Canada Agreement, which by many accounts is a significant improvement over the NAFTA deal it replaces. After more than a year of talks between the White House and Democrats, the Democrat-controlled House passed the deal in December. The Senate is expected to follow suit this month, giving companies in all three nations more certainty in trade rules going forward, another boost for investment.

British voters resolved another key political uncertainty in December ​– Brexit ​– by strongly returning the Conservative government of Boris Johnson to power. The vote has given the prime minister the mandate to definitely pull Britain out of the European Union by Jan. 31. Economically, however, the future remains as fuzzy as ever, since both sides still have to negotiate a trade deal and no one is quite sure what the prime minister really wants.

If Mr. Johnson really expects to complete that by the end of this year, as his Conservative Party has pledged, that is barely enough time to negotiate a bare-bones trade agreement, says Olga Bitel, a global strategist at William Blair, a Chicago-based investment firm. That means substantial short-term disruption for the United Kingdom’s already anemic economy. 

“On a multiyear view, forecasts so far point to the UK economy being smaller under any Brexit scenario,” she writes in an email. “Most of the past seven decades (and thousands of years of human history) point to economic integration. For a small, open economy to elect going it alone, is a substantial departure from trend.”

Finally, key central banks have made clear they’re not going to raise interest rates anytime soon. The Federal Reserve, which entered 2019 expecting to raise rates, instead cut them three times when economic indicators started flashing warnings. With recession fears receding, the central bank now looks set to stand pat for months to come. The European Central Bank has also made borrowing cheaper. And China’s central bank on Wednesday said it would cut cash reserve requirements for banks, effectively pumping more money into the economy.

None of this suggests the beginning of a 21st-century “Roaring Twenties.” Last year was the slowest for world economic growth since the financial crisis a decade earlier, according to the Organization for Economic Cooperation and Development, and this year will be only slightly better.

Outside of a very few outliers, such as an accelerating Brazil, most nations are expected to see only muted improvement. And a major reason for that: China’s huge economy continues to slow.

“While it is tempting to blame much of the recent slowdown on the U.S.-China trade war, the decade-long deceleration is the result of both structural and cyclical factors,” such as an aging population and falling productivity, says Mr. Behravesh of IHS Markit. Already, China’s 6.2% growth rate in 2019 was the slowest expansion in three decades, he points out. And he expects growth to fall below 6% this year.

Other analysts, such as Mr. Kennedy of the Center for Strategic and International Studies, are more sanguine. He says growth already bottomed out last year and will pick up slightly as China continues to transition from its reliance on exports to the growth of its huge domestic market. 

“The upside sources of growth are going to be expanding consumption by Chinese consumers,” he says. “China has more middle-class consumers than anybody.”

In the U.S., too, hopes for a better 2020 rest on consumers. “The upside story is built around continued durability of consumer spending,” says Mr. Gapen of Barclays.

https://www.csmonitor.com/Business/2020/0102/What-recession-Pessimism-recedes-for-global-economy-in-2020?icid=rss