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. The pace of credit growth continued
to be lackluster, putting pressure on the domestic economy. At
the same time, the Chinese government cut taxes further.
We believe that 2020 will bring more of the same and some
additional stimulus will follow. As the benefits from prior tax
cuts fade, China’s consumer spending is likely to come under
pressure. Investment growth has been weak, especially for
infrastructure and manufacturing. Housing investment has
held up well, but we think it could come under pressure in
2020. We do expect some improvement in credit growth as
the flow of credit remains insufficient to sustain an acceptable pace of economic growth. This credit is likely to be funneled
into stimulating infrastructure projects, as we believe stimulus
via further significant tax cuts will be difficult.
China's infastructure spending and "shadow" bank lending on the rise
Source: Ivy Investments analysis of the correlation between China infrastructure spending and shadow
bank lending. Data show % change year to year for infrastructure spending, 1-year moving average of the
monthly flow of shadow bank credit.
We think a pause in the trade spat between the U.S. and China
is likely to boost domestic Chinese manufacturing. We believe
China’s leadership would welcome that boost because further
weakness could bring a problematic rise in unemployment.
Overall, we expect Chinese GDP growth to stabilize around
6% in 2020, slightly below 2019’s growth rate.
External risks contributed to weakness in other economies
for the year. The eurozone is an open economy, so swings
in global trade have an outsized impact relative to other
economies. The uncertainty about the future of global trade
created a significant slowing in the eurozone, especially in
Germany. In addition, uncertainty about the U.K.’s potential
exit from the EU triggered a further reduction in business
confidence. The European Central Bank (ECB) announced
additional easing in September, pushing interest rates further
into negative territory and introducing another round of
quantitative easing via bond purchases. While we believe
average GDP growth in 2020 will be similar to the estimated
1.2% average in 2019, we expect the pace of eurozone growth
to improve throughout 2020 on the back of a better global
economy and reduced risks around trade and Brexit.
U.K. business sentiment falls as Brexit drags on
Source: Ivy Investments analysis of the correlation between U.K. business investment and employment
surveys. Data show % change year to year of capital spending hiring intentions.
Delays related to the expected Brexit conclusion hindered
U.K. growth through much of 2019. Confidence suffered from
the inability of the U.K. Parliament to rule out a hard Brexit,
in which the U.K. would leave the EU without any agreement,
and that kept recession fears at the forefront. Those risks were
amplified in July when Boris Johnson took control of the
Conservative Party and was named prime minister. Johnson
struck a deal with the EU on Brexit and, while Parliament
was amenable to that deal, it would not agree to the timetable
Johnson demanded. This led Johnson to call for early
elections in an attempt to garner a Parliamentary majority
and ultimately gain approval of the Brexit deal.
We think the fact that a staunch Brexit supporter like Johnson
is seeking a deal with the EU indicates the risk of a hard Brexit
may be off the table for the U.K.
2020 global outlook — Poised for a rebound?
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