Is there more stimulus on the cards for global markets in 2020?
The theatrics of global politics, devastation of cross-border attacks and far-reaching impacts of the US-China trade stalemate beg the question: will global growth need a helping hand in 2020?
Can global share markets keep trending upwards after a stellar 2019? Is there any end to US-China trade wars? Will President Donald Trump be re-elected? What about Brexit?
Will the world’s biggest central banks – the US Federal Reserve, the European Central bank, the Bank of England and the Bank of Japan – remain generous in their monetary policy settings?
Is corporate debt a time bomb waiting to go off, as suggested by the International Monetary Fund a couple of months ago when it said up to 40 per cent of corporate debt in leading economies would be unserviceable in the event of a recession? The World Bank has similar concerns about the level of debt in developing economies.
Seldom has a year begun with so many uncertainties. Yet AMP Capital senior economist Diana Mousina thinks 2020 will be a good year for global economic growth.
“Our general thematic for 2020 is for stronger growth compared to last year,” she says. “If you compare where we are now to 12 months ago, the global economy is in a much stronger position.”
“We’ve had some steps towards an agreement around trade although we don’t think there will be any broad resolution before the US election. There’s still this hawkishness towards China from both political parties in the US.”
At the beginning of 2019, the global outlook was problematic. Global securities markets were expected to lag, not reach new highs. Brexit and trade wars were foremost in people’s minds. While growth across the globe was only moderate, the strength in the US economy in 2019 proved a boon for many investors.
Any progress on the US-China trade deal is critical to investor returns during the next year, Mousina says.
The four most dangerous words in investing are: this time it’s different.”
- John Templeton
“I think we might get some more good news on that. There’s some good news on phase one around tariffs. We expect there will be something in phase two as well, maybe around intellectual property issues and access for US firms into China."
“And then you have some signs that the global manufacturing cycle is starting to at least stabilise, particularly in the auto sector which is important.”
The United States remains the world’s biggest economy and drives many other economies.
“I don’t really see any major changes the US over the next year,” Mousina says. “It remains in a pretty good position with a low unemployment rate and growth in wages. There probably won’t be another rate cut from the Fed and if there is, it will just be one just to get inflation a bit higher."
“Interest rates are unlikely to be hiked in the US in 2020. I think that the Federal Reserve will remain on hold, which would be positive for the economy there. The budget was agreed to and there was some rollback of expiring tax breaks. From the fiscal side, the US isn’t going backwards either. In fact you are probably getting a bit of fiscal stimulus there,” Mousina says.
“China will be stronger in 2020, and that should also be good for the Eurozone economy which relies on Chinese demand. Normally Eurozone exports and Chinese growth are very closely correlated so a stronger China is good for Europe. But manufacturing in the Eurozone remains weakened."
I think that the Federal Reserve will remain on hold, which would be positive for the economy there... From the fiscal side, the US isn’t going backwards either. In fact you are probably getting a bit of fiscal stimulus there.”
“The Eurozone is getting a bit of a boost from the fiscal side. Eurozone budgets showed a positive fiscal impulse into 2020. Not huge, but still the contribution to growth is positive. While there’s weakness in Eurozone growth, its more likely we will get something out of Germany in 2020. And maybe even from some of the other Eurozone economies, like France.”
Two of the biggest news stories for the US in 2020 are the impeachment of President Trump and US election. For Mousina, the impeachment will be a non-issue but the election is important. A Democratic President will probably mean higher taxes and regulation which would hit sharemarkets.
“Normally in the election years you tend to see business investment struggle a bit. Also, with the trade dispute, if you are running a business and thinking of where you are going to build your next production facility you don’t really know what to do."
“I think that capital expenditure will struggle in the US, which was an issue last year. But on the other hand, the consumer is still very strong and bond yields had been falling. They are still very low."
“And the housing market in the US is starting to recover so the housing construction story will be positive,” Mousina says. “The US can grow at two per cent growth this year, which is probably in line with their potential, even with the election coming up.”
“In China, we’ve seen the government doing stimulus and it will probably do more in 2020. It should expand at around six per cent and that will lead to better Asian growth."
“In Japan, they’ve got fiscal stimulus, probably worth about one and a half percent of GDP, however this will be spread out over a couple of years. It’s more government spending, probably some infrastructure spending, to offset the negatives to the economy from the increase in the consumption tax last October."
“I’m just seeing a lot of positive little things out of China and Japan that will be a positive for Asian trade in general."
“The UK is still really difficult to analyse because they have to create a longer run free trade agreement or some kind of agreement with the Eurozone. While they have agreed to an interim transition period, it’s hard to see them being able to agree to a trade deal with the eurozone within a year and I don’t know if the Eurozone would want to extend that deadline.”
The monetary policy question is critical to the outlook for the year. While US monetary policy will be broadly stable, Chinese authorities are likely to cut rates, Mousina says.
“They may not cut specific consumer interest rates, but probably things like their reserve requirement ratios helps liquidity in China."
| A trusty barometer |
The automobile industry has long been a benchmark of major economies, from Germany, to the United States, Japan and more recently China. Apart from creating jobs, it has a significant flow on to other parts of an economy and provides a beacon for economies as a whole. “In every single major country or developed economy we’re seeing a huge collapse in auto sales,” says Mousina. “And it’s happening in economies where you have low unemployment rates and strong consumers like in the US.” “It has big implications for manufacturing-intensive economies like Germany, where it’s close to 30 per cent of GDP. And then other industries are linked to it, like all the service industries and parts.” But there is good news, Mousina says. “The forward-looking indicators are starting to look a little bit more positive. Demand for auto loans is now positive rather than negative, where it has been for the past six months. Inventory levels have been drawn down to such a large extent that sales and production levels are now starting to stabilise. On these kinds of indicators, I’m a bit more optimistic.” |
“The Eurozone will still be doing quantitative easing though they probably won’t add to the program. Any stimulus is more likely on the fiscal side. Japan will be keeping rates at very low levels for a long time. So, I don’t see any major cuts to interest rates by central banks globally, although maybe there’s another cut from the US."
Inflation remains dormant, notwithstanding some wage pressures in the US, Mousina believes.
“Commodity prices are likely to have a better year, given the US dollar has probably peaked for now. With the rest of the world improving. US growth won’t be the standout performer which normally tends to be negative for the US dollar. And normally when the US dollar falls, we tend to see commodity prices do better,” she says.
The manufacturing sector is a strong driver of the global economy, in part because of the jobs produced when the sector is booming.
“I’m probably more optimistic than the consensus on manufacturing. It would be good to see PMIs (purchasing manufacturing index which measure the health of the sector) improving. It’s important to keep an eye on them."
“I think that in 2020 the outlook for the equity markets is still positive. But then after 2020 is when things will get a bit more muddled, because you kind of expect we’ve had this huge increase in stock prices because central banks have been cutting rates over the past year. How much further can it go in 2021? Twenty twenty-one is when I start getting a bit more worried about signs of a recession.”
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