Global economy to slow, tensions to ease in 2020: report

15 Dec '19

4 min read

Pic: Shutterstock

Global economic growth is likely to fall to just over 3 per cent in 2019 and 2020 from 3.8 per cent in 2018, while easing US-China trade tensions would lead to a ‘noisy ceasefire’ for the US election year, according to a new 2020 outlook report, which projected ‘a bottoming of economic growth’ in spring, as trade tensions fade and recession risk remains lower.

Meanwhile, global inflation will dip to 2.7 per cent by 2021 from 3.1 per cent this year, the report by Bank of America Merrill Lynch Global Research said.

"A trade war ceasefire, a super preemptive Fed and aggressive easing from China together suggest relatively low recession risk in 2020," Ethan Harris, head of global economics at the organisation said.

"The new year and decade begin near the tail end of the longest bull market on record, and despite recent strong gains, investor anxiety remains at a high level," Candace Browning, head of BofA Merrill Lynch Global Research, said in the report.

"Many of the driving factors - central bank policy, globalization, oil - have peaked, and new economic paradigms are emerging in response to a different set of challenges facing the world's social, environment, political and economic systems," she noted.

As the global economy and US-China trade frictions have been approaching ‘the eye of the storm’, Harris said he expected a noisy ceasefire for the US election year and he remained optimistic over a potential ‘mini deal’, as trade tensions seem to be de-escalating earlier than expected.

"Right now we're reaching a point where the Trump administration has a strong incentive to do some kind of deal. There's an election year coming up. The economy is slowing down," he elaborated, according to information posted on the website of the economic and commercial counsellor’s office of the Chinese Embassy in South Africa.

"The last round of tariffs is mainly on consumer products, which is a politically risky set of tariffs. So we think the incentive to strike a deal is quite high," Harris added.

"An interim, skinny US-China trade deal should temporarily relieve trade concerns ahead of the US presidential election and pave the way for a midyear, mini-boost in global growth led by US rates and a weaker dollar," said the report.

Yet Harris voiced concern that trade headwind may well return after the US election.

The lackluster forecast of global growth indicates that the slackness is ‘broad-based’, as nearly every major economy has performed worse than expected this year and the global manufacturing sector has been heavily hit, mainly due to the trade tensions, said the report.

Regionally speaking, the institute forecasts the European economy to grow by 1 per cent in 2020 despite challenging external conditions, while its core inflation would inch higher to 1.3 per cent in the year ahead.

It also pointed out that the outlook for emerging market economies largely depends on the developments of US-China trade scenarios in 2020.

"Total emerging market returns of 7.1 per cent in local debt are forecast, but only 2.6 per cent for external debt. Latin America is mounting a cyclical recovery, likely led by Brazil and Andean economies, while Argentina's new government faces extreme economic challenges," said the report.

The US gross domestic product (GDP) is estimated to pull back to trend, with growth averaging 1.7 per cent over the next two years, and inflation should be muted, with core personal consumption expenditure (PCE) inflation at around 2 per cent by the end of 2020.

Looking ahead to 2020, the US economy is vulnerable to external shocks and uncertainty caused by the trade tensions and the presidential election, but the baseline is for the economic recovery to continue, according to Michelle Meyer, head of US economics at the organisation.

The research team also found that the world's central banks responded to weakness in growth and inflation by cutting rates, with 24 of 39 central banks covered in the report easing their policies this year.

Fibre2Fashion News Desk (DS)