The global economy faces its most challenging year in over a decade. Policymakers still have options, but can they use them effectively?
We’ve revised our forecasts and now expect the global economy to grow by just 2.3% next year, the lowest in ten years. That’s not weak enough to be called a recession and it’s certainly not comparable to 2009 (when global output contracted by 2%), but it does represent a material slowdown that could leave the world more vulnerable to adverse shocks.
Manufacturing Weakness vs. Consumer Resilience
Several factors make the global outlook more challenging than normal. Debt, demographics and anemic productivity growth mean the secular backdrop is weak. The trade war between the US and China has led to rising uncertainty and helped push global trade growth into negative territory for the first time since the global financial crisis (GFC).
It’s not surprising that the worst-hit countries have been open economies with large manufacturing bases, like Europe and Japan. To date, this has been very much a manufacturing-led downturn—in contrast to downturns led by the consumer or financial cycle which have often mutated into deep recessions.
The good news is that consumer and capital spending have so far held up well, even in Europe. The bad news is that persistent weakness in manufacturing and trade could eventually spill over into investment and jobs, dragging overall growth lower. With trade tension here to stay and a possible US-led currency war on the horizon, it’s hard to see a catalyst for a speedy turnaround in manufacturing.
Monetary Policy in a Negative Rate Environment
As ever, the first line of defense against a protracted slowdown in global growth is monetary policy. In this respect, it’s comforting to see easing underway in China, the US and now the euro area, and we expect more of the same over the coming year.
But while pushing interest rates even lower and inflating balance sheets even further may give a short-term lift to asset prices, it’s much less clear that this will have a material, positive impact on growth. That’s a particular concern in Europe and Japan, where the rate structure is already negative and monetary policy may already be ineffective.
Where does this leave us? Since contracting sharply during the GFC, the global economy has enjoyed 10 years of unbroken, if unspectacular, growth. We don’t expect that to change next year. But a combination of weak secular growth, ongoing concerns about the future of the global trading system, declining policy effectiveness and lingering populist risks means that 2020 may be the most challenging year for the global economy since 2009.
Three Potential Surprises
So, is there anything that could breathe new life into the global economy and lead to a more positive outcome? Three channels could prompt better-than-expected growth next year: an end to the trade war, surprisingly effective monetary policy and fiscal policy riding to the rescue.
We remain cautious on all three. For example, we see the trade war as being a manifestation of two key secular trends—populism and geopolitical conflict between China and the West—rather than something that can be solved by a “tweet” or even the end of Donald Trump’s presidency.
And while we have long thought the burden of supporting growth and inflation would eventually shift to fiscal policy, we need to see evidence that the transition will be fast enough and broad enough to make a material difference to 2020 growth. Still, we’ll be monitoring this and other factors carefully.
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- Darren Williams
- Director—Global Economic Research