Global economy should continue to grow with low inflation in 2020, according to John Greenwood, Chief Economist of Invesco

·    Current business cycle expansion can be maintained and supported by monetary growth and healthy private sector balance sheets. Despite widespread discussion of it last year, a US recession is not imminent.
·    Slowdown in growth and inflation for China and India to extend into 2020 due to credit crunch
·    Eurozone remains stuck in weak growth environment with low inflation and negative interest rates; diminishing uncertainty around Brexit should enable the UK economy to start to return to normal.

Hong Kong, Australia, Japan and Singapore – 9 January 2020: The global economy in 2019 was subject to geopolitical tensions, trade wars and a prolonged downturn in manufacturing. Looking to 2020, Dr. John Greenwood, Chief Economist of Invesco forecasts another year of moderate expansion with low inflation. The major emerging economies including China and India will continue to face headwinds.

Although geopolitical and other disturbances to the business cycle may sometimes be disruptive enough to precipitate a recession, Dr. Greenwood stresses that the forces underpinning the business cycle upswing – primarily monetary growth and the strong state of private sector balance sheets – outweigh other negative forces. “The year ahead should be one in which there will be much talk of an imminent recession or downturn, but the outcome is expected to be basically more of the same as we saw in 2019, not a year of recession”, said Dr. Greenwood.

United States: a continued upswing in economic activity
Despite widespread and misplaced anxieties about the risk of a recession in the US during the past year, the US economy continued to grow satisfactorily at 2.1% in the third quarter of 2019.  Dr. Greenwood argues that the market has been overly worried by continued low investment, slowing trade due to President Trump’s tariff wars, other geopolitical risks such as Brexit as well as military conflicts and disruptions to oil supplies in the Middle East.

Despite these concerns, US private sector balance sheets in aggregate have deleveraged substantially, Dr. Greenwood notes, with debt declining from 296% of GDP in Q3 2008 to 226% in Q2 2019, bringing the private sector debt-to-GDP ratio back to 2001 levels. Meanwhile, inflation is low and is expected to remain subdued through 2020, which indicates the US Federal Reserve will not be compelled to tighten monetary policy abruptly.

Additionally, monetary conditions have eased substantially during the past six months. Since April 2019, M2 growth has roughly doubled from around 4% annualized growth to just around 8%. Dr. Greenwood notes all previous episodes of faster M2 & M3 growth for a sustained period of six months or more have been accompanied by an upswing in asset prices, followed by an acceleration of nominal spending on GDP.

Dr. Greenwood commented: “The US is still midcycle, not late cycle. This implies a record eleventh and, from July 2020, twelfth year of economic expansion since 2009, the longest in recorded US financial history.”

Emerging Markets: tight money in China and India creates headwinds
In China, Dr. Greenwood notes that in addition to trade disruptions, domestic factors are also depressing economic activity. Since 2017 the Chinese authorities have shifted to a broad policy of de-leveraging, and since then, lending by the shadow banking industry has been curtailed, bank credit expansion has been reduced, and M2 growth has fallen to 8-9% year-on-year, the lowest growth rate in 40 years. Despite token cuts in interest rates and reductions in the reserve requirement ratio (RRR) for banks by the People’s Bank of China, the monetary squeeze has remained in place.

Similar to China, credit growth in India in the official banking sector averaged over 31% through 2005-06, and M3 peaked in 2007-08 at an annualized rate of 23%.  Since then, both money and credit have seen a prolonged slowdown, decelerating to 9.8% at the end of 2019. Since 2016, non-performing loan ratios for public sector banks have climbed to over 12% as of end March 2019, and in the past two years there has been a significant squeeze on non-bank financial companies (shadow banks).

Dr. Greenwood commented: “Like the developed economies during the global financial crisis, both China and India are experiencing a credit crunch that is affecting both their formal and informal banking systems. The consequence is a distinct slowdown in economic growth and inflation for both economies which should extend well into 2020.”

The slowdown of these two giants of the emerging world would also inevitably affect demand for commodities from other EM economies and the supply chains that they are linked to, Dr. Greenwood further asserts. There remain threats to certain other EM economies, especially those which are the most exposed to global value chains and global trade in general.

Europe & UK: Slow growth remains, Brexit uncertainty abates
The Eurozone experienced a major setback in manufacturing over the past eighteen months, and unemployment is still too high in several regions of the euro-area. Inflation remains well below the 2% target which reflects chronically weak demand as a result of inadequate monetary growth. Under present monetary policies, Dr. Greenwood expects little prospect of reaching a growth rate of domestic nominal spending that will enable employment and interest rates to return to healthy levels. Furthermore, the combination of the ECB’s negative interest rate policy and sluggish growth will continue to damage the long-term savings industry – savings deposits, life insurance contracts and pension funds – across the continent.

Despite economic uncertainty following the June 2016 Brexit vote, the United Kingdom still experienced relatively strong economic activity (including wages and employment) in 2019, driven by growth in consumer spending. Investment though has contracted in recent quarters due to a lack of clarity on the future business environment. Dr. Greenwood predicts the newly-elected Conservative majority in the House of Commons should reduce this uncertainty for the private sector, and real GDP growth in the United Kingdom should return to more normal rates.

Consensus Economics 2019 Expected 2020 Invesco Forecast*
(Invesco Forecast*)
  Real GDP CPI Inflation Real GDP CPI Inflation
US 2.3% 1.8% 1.8% (2.4%) 2.0% (1.9%)
Eurozone 1.1% 1.2% 1.0% (1.3%) 1.2% (1.2%)
UK 1.3% 1.9% 1.1% (1.5%) 1.9% (1.7%)
Japan 1.0% 0.2% 0.6% (1.0%) 0.7% (0.6%)
Australia 1.8% 2.4% 1.6% (2.1%) 1.9% (2.0%)
Canada 1.5% 1.6% 2.0% (2.2%) 1.9% (1.8%)
China 6.1% 2.6% 5.8% (5.8%1) 2.7% (1.2%)
India 5.8% 3.5% 6.7% (5.3%1) 3.9% (3.8%)

1These are our estimates of “official” real GDP; based on Invesco’s activity indices we forecast lower actual growth rates.

Source: Consensus Economics, Survey Date: 11 November 2019, and Invesco as of 9 December 2019

* Forecasts are not reliable indicators of future performance.

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