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What the Global Economy Has in Store for 2020

Following a turbulent year that saw global economic growth weaken to 2.6 percent from 3.2 percent in 2018, amid trade wars and struggling emerging economies, the outlook for 2020 is for greater stability, barring jarring external factors, IHS Markit said in its annual economic forecast.

“The bright spots in the global economy are consumer spending and improved financial conditions,” Nariman Behravesh, IHS Markit chief economist, said in a webinar Tuesday offering his top 10 economic predictions for the coming year.

They are:

1. U.S. economy will grow at trend–around 2 percent.

Real U.S. gross domestic product (GDP) growth was above trend from 2017 to 2019, thanks to fiscal stimulus, Behravesh said. However, with the effects of this stimulus wearing off, growth is returning to trend, with second- and third-quarter growth rates at 2 percent and 2.1 percent, respectively.

“For the fourth quarter, we estimate an even weaker 1.6 percent rate,” he said.

Noting a rebound in production at General Motors, the “phase one trade deal will help some,” Behravesh said, and an expectation that consumer spending–roughly 70 percent of the economy–will increase about 2.7 percent in 2020, “putting a floor on growth in the broader economy.”

IHS forecasts real GDP to expand 2.1 percent in 2020, 2 percent in 2021, and an average of 1.6 percent in 2022 and 2023.

2. Europe’s economy will stabilize and recover a little

“The slump in Eurozone growth in 2019 to 1.2 percent compared with 2018 (1.9 percent) was alarming, with some large economies, notably Germany and Italy, coming perilously close to recession,” Behravesh said. “Nevertheless, there are some signs that the worst may be over.”

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Consequently, IHS Markit expects Eurozone growth to stabilize around 0.9 percent in 2020 before picking up a little to 1.1 percent in 2021.

Meanwhile, notwithstanding the results of the recent election, the U.K. faces a hard slog and growth is predicted to drop from 1.2 percent in 2019 to 0.6 percent in 2020, before rising to 0.8 percent in 2021.

 3. Japan’s post-tax-hike growth stumble will be cushioned by more stimulus

Japan’s real GDP growth rate strengthened to 1.1 percent in 2019 from 0.3 percent in 2018, but Behravesh said fourth-quarter real GDP will likely decline quarter on quarter in response to the hike in the sales tax to 10 percent from 8 percent.

“The good news is that the increase in the sales tax will help to stabilize Japan’s government debt ratio, the largest in the developed world,” he said. “After slowing to 0.3 percent in 2020, Japanese real GDP growth is projected to recover to 0.5 percent in 2021.

4. China’s growth rate will fall below 6 percent

China’s growth rate has been falling steadily since 2010, Behravesh said, when it was 10.6 percent, and the expected 6.2 percent expansion in 2019 will turn out to be the slowest since 1990.

“Policymakers are currently engaged in a balancing act,” he said. “They would like to cut the debt ratio, or at least keep it from rising, while providing enough stimulus to keep growth from falling too fast.”

IHS Markit predicts that China’s growth rate will slide even further to 5.8 percent in 2020 and 5.6 percent in 2021.

5. Emerging markets will continue to tread water as debt reaches new peaks

While the long slide in China’s growth rate has been a key drag, emerging markets also faced two other stiff headwinds–lackluster expansions in the developed world and falling commodity prices, IHS noted.

“Fragile recoveries in the developed world and sliding commodity prices, along with the simmering trade war and the continued decline in China’s rate of expansion, mean that there is little scope for growth in the emerging world to rise much, if at all, from current low rates,” Behravesh said. “A growing concern is the record level of debt in the emerging world, encouraged by low global interest rates.”

6. Commodity prices will trend down

The push-pull forces in commodity markets remained in full force during 2019, with prices rising in the first half and falling in the second half of the year, Behravesh said.

Oil markets have been buffeted by news regarding weak global growth, OPEC production cuts, non-OPEC production increases, an attack on Saudi production facilities and the trade wars, he said.

IHS expect the average prices of crude oil to drop to $57 a barrel in 2020 from $64 per barrel in 2019.

7. Inflation will remain subdued

There is early evidence that the underlying rates of price and wage inflation may be creeping up in the developed world, but the chances of a major “breakout” are remote, Behravesh said. “Weak growth and sliding commodity prices will keep inflation at bay.”

Global inflation in 2020 is expected to be just 2.6 percent.

8. The global monetary easing cycle will probably come to an end

The Fed lowered the federal funds rate three times in 2019, while the European Central Bank began a renewed bond purchase program and more interest rate cuts. The argument could be made, Behravesh said, that the 2019 monetary easing cycle helped to put a floor on growth in many parts of the world.

9. The U.S. dollar will rise a little more

The dollar, adjusted for inflation and trade-weighted, has risen around 9 percent since the beginning of 2018. This rise is almost entirely due to economic fundamentals and has little to do with currency “manipulation,” Behravesh said.

“The U.S. economy has been growing faster than most other developed economies and interest-rate differentials between the United States, on the one hand, and Europe and Japan, on the other, favor dollar-denominated assets,” he said. “Going forward, these dynamics are likely to stay in place, but ease some.”

IHS Markit expects that the dollar will climb another 3 percent during the next two years before beginning a long and gradual retreat.

10. Despite historically high levels of policy uncertainty, recession still not the most likely scenario

“Recession fears were pervasive in early 2019,” Behravesh said. “By the summer, IHS Markit was assessing the risks of a recession at nearly 30 percent. However, the global economy seems to have dodged a recession–manufacturing activity appears to have reached a trough and financial conditions have eased considerably. This has led us to lower the risk of U.S. and world recessions to about 20 percent.”

However, he added that “a big threat to the global economy remains either an escalation of the U.S.-China trade conflict or its spread to other parts of the world, notably Europe. Another potential for a policy mistake is the hesitation from many governments, especially in the Eurozone, to provide more fiscal stimulus.”