Global trade continues to pressure China and eurozone

12.17.19

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
Chart Showing China's infastructure spending and

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
Chart Showing 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 Market Outlook


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2020 global outlook — Poised for a rebound?

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