The global economy slowed in 2019 and is now growing at below trend. This is mainly due to the slowdown in capital spending as the US-China trade war introduced significant uncertainty to business decision-making. It was also driven by the lagged effects from tighter financial conditions in 2018.
We expect the US economy to continue to do well, growing at close to trend. We doubt, however, that the labor market can improve much further and expect the unemployment rate to stabilize below 4%. That should continue to apply moderate upward pressure on wages, which should support household income growth and consumer confidence — a crucial factor in economic growth. If, as we expect, the trade war doesn’t escalate further, we should see a pickup in business confidence. However, for that to lead to much higher capital spending, we would need to see an improvement in company profit margins, which have been under both internal (wages) and external (trade) pressures. In Europe and Japan, we would expect economic growth to recover on the back of the strength in labor market and consumer balance sheets as well as external factors such as a pickup in global trade activity.
The outlook for China may be improving, as both the central bank and the government are taking measures to stimulate the economy and reverse earlier efforts to restrict credit growth. Thus far, China has been less aggressive in stimulating the economy than it was in 2016, and whether they will do something on a larger scale remains to be seen. Regardless, a lot depends on the next steps in the US-China trade war. At the time of writing, we were close to an interim “phase 1” trade deal. Whether that is material and will undo the damage already done remains to be seen. It appears that the two sides might agree on some more straightforward deals, such as the buying of certain goods, and will delay the more difficult conversations around intellectual property to “phase 2.” Also, as part of phase 1, planned tariff increases may be removed. Most of the emerging world is showing broadly sound economic fundamentals; however, the trade-war narrative and the extent of the China stimulus are likely to be the ultimate deciders of whether the emerging economies move back to trend (and perhaps above) or stay at weaker levels.
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