The global economy struggled in 2019. Trade wars were the primary focus of markets, but other
factors also were at play. Waning benefits from U.S. fiscal stimulus, elevated inventory levels,
Brexit chaos, a stronger U.S. dollar and the lagged effects of tighter monetary policy in places like
the U.S. and China coalesced to weaken the pace of global growth. We believe some of those
headwinds are reversing and could provide some lift to global growth in 2020. Overall, we expect
global gross domestic product (GDP) growth to average 3.4% in 2020, a slight uptick from 2019’s
estimated 3.0% growth rate.
Investor confidence remained consistent throughout the year with most equities posting doubledigit
returns. This confidence has not only sustained the record-long bull market — now in its 11th
year — but also created the best performing run in history.
U.S. economy maintains
The U.S. economy slowed in 2019 to an estimated
2.3%, down from 2.9% in 2018. Interest rate hikes and
a shrinking balance sheet from the U.S. Federal Reserve
(Fed) coupled with the diminished fiscal benefits from
the 2017 tax cuts would have been enough to slow
the expansion. However, President Donald Trump’s
escalation of the trade war with China and tariff threats
toward other major trading partners — including the
European Union (EU), Canada, Mexico and Japan —
further pressured the economy.
The Fed will hold the line
on rates in 2020
Uncertainty around trade and the weakening of the global
economy pressured the Fed to reverse its policy during 2019.
After projecting two rate hikes at the start of the year, the
Fed cut interest rates three times in 2019 and bringing the
federal funds rate target range to 1.50–1.75%. We believe
this reversal could further boost the housing market. In
addition, the tightness in short-term lending markets caused
the Fed to allow its balance sheet to grow again, which
should remove the stealth tightening that was taking place
by leaving the balance sheet unchanged.
Overall, we expect the Fed to leave rates unchanged
throughout 2020. Fed Chairman Jerome Powell has
indicated the U.S. central bank will raise interest rates
only when inflation moves higher in a “significant” and
“persistent” manner. If the Fed does decide to make a
change, we believe a rate cut is more likely than a rate hike
as inflation is likely to remain relatively muted.
Global trade continues to
pressure China and eurozone
China’s economy weakened throughout much of 2019
as policymakers attempted to find the right balance between
reducing the pace of debt accumulation and preventing much
weaker economic growth.
Reforms taking hold
in emerging markets
Emerging markets felt the effects of weak global trade in
2019, which led to disappointing economic growth overall.
Turkey and Argentina had major recessions because of
what we believe were self-induced problems. We think
most emerging market economies could improve as global
demand strengthens, the U.S. dollar potentially weakens
and lower interest rates feed through the system.
India’s economy struggled in 2019, due in part to declining
credit. A funding crisis among several non-bank financial
companies — a key source of funding for India’s economy
— triggered a significant slowdown in the country’s
GDP growth. The Reserve Bank of India slashed interest
rates and the government announced a reduction in the
corporate tax rate, among other measures. We believe
economic growth will find a bottom in early 2020 as the
Indian government continues to stimulate the economy.
Policymakers in Brazil took steps in 2019 to help the
economy continue to recover. This included critical
pension reform, which could help stabilize government
debt, as well as more accommodative policy from the
central bank, which cut interest rates to a record low 5%.
Brazil’s government would like to push forward additional
reforms in 2020, including tax reform and changes to
fiscal spending rules.
Wildcards to watch
Fears of a global recession were heightened at mid-2019
after the U.S. Treasury yield curve inverted, leaving long-term
rates below short term. We do not think a recession is likely
in 2020. Our biggest fear continues to be related to trade. If
the trade agreement between U.S. and China breaks down at
some point, our confidence in a continuation of economic
growth will fall and recession risks would likely rise.
We also have concerns related to the 2020 U.S. presidential
election. The Trump administration’s policies have been
decidedly pro-business, including deregulation and tax
cuts. If an anti-business nominee emerges from the U.S.
Democrat Party and demonstrates a strong chance to
become president, we believe companies could again
begin to reduce spending, which could lead to another
Finally, there are geopolitical hotspots around the world
that have potential impacts on the global economy. If
Iran continues to be a disruptive force on Middle East oil
production and shipment, a spike in energy prices could
be damaging, given already weak global demand. In
addition, the global rise in the popularity of parties
espousing nationalism could further escalate tensions
Market and sector view
Despite the prevailing headwinds of lingering trade turmoil and slowing global growth, strong
underlying fundamentals and a “Goldilocks” economy that is not too hot/not too cold have combined
to support overall investor confidence. This confidence has not only sustained the record-long bull
market – now in its 11th year – but also created the best performing run in history. The S&P 500 Index
has returned nearly 475% since March 2009, surpassing the long boom of the 1990s.
2020 global outlook — Poised for a rebound?
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