World – Macroeconomic Scenario for 2019-2020
“A new wisdom for a new age”
J.M. Keynes (1925)
Even after it was felt (with shamefully naive optimism) that sweet reason would prevail, and people believed that the United States and China would be able to embark on the road to a compromise as a prelude to a “happy” resolution of their differences, a trade war is still looming. And this, despite the truce concluded between Presidents Trump and Xi at the G20.
The trade war is only one component – a highly visible one, it is true – of the manifold China-US tensions. This dispute, a confrontation between a great power that senses its hegemony under threat and another, competing and winning, great power, looks like it’s here to stay. It is likely to spread over time so long as the benefits in connection with maintaining the attributes of a “super-power” exceed the short-term costs of destroying the rival power. While some of the US demands (improved access to the Chinese market and protection for intellectual property) can still be considered by the Chinese, its demands as regards the subsidies granted to state-owned enterprises cut to the heart of China’s development model and are, quite simply, unacceptable. Some phony respite phases are obviously possible, but in no way do they portend any lasting easing of China-US relations.
Trade tensions, and beyond these, geopolitical tensions, therefore look set to last and are hampering growth.
In the United States, apart from the natural run-down of the growth rate, uncertainty and shrinking corporate margins will result in a contraction in productive investment in 2020. We have factored a slight recession in 2020 into our central scenario. Our assumed preventive monetary easing on the part of the Federal Reserve (especially justified as there is no threat of inflation) would, however, prevent growth and the equity markets from going into free fall. The US cycle, with its impressive longevity, would thus end on below-potential year-on-year growth at end-2019 (at 1.5%, vs 2.2% in 2018). On average, annual growth should come out at 2.5% and close to 1% in 2019 and 2020 respectively.
In the Eurozone, the end-of-cycle is proving “abnormal”. The most recent, mostly favourable, numbers suggested that growth had dropped excessively as a result of temporary factors. Once that correction had been absorbed, growth might have been likely to pick up once more, although at a more subdued rate. But the mismatch between these “hard data” that are still testifying to the strength of domestic demand, and the less encouraging signals from the surveys, suggests caution. The surveys seem to have captured a greater uncertainty than the straightforward caution that usually accompanies a cyclical slowdown. The uncertainty, the materialisation of the risk linked to international developments, is thus having a depressing effect on forecasts, especially on forecasts for investment, even though the deterioration in the earnings outlook is still limited. But domestic demand seems unlikely to suffer from a sudden correction and the preventive action of the ECB, by removing the financial constraint on a lasting basis, should keep growth near its potential level (an annual average close to 1.2% in 2019 and 2020).
In China, the wide-ranging and lasting trade dispute with the United States will have direct negative impacts on trade flows, and indirect impacts on consumption and investment which, added together, could slice close to 1 and 1.8 percentage points off GDP growth in 2019 and 2020 respectively. The consequences of the slowdown are already visible in the labour market, whose resilience is a decisive component of social stability. The Chinese authorities are thus gearing up to adopt a response on a par with the problem in order to offset the fall-off in aggregate demand. They will go into action on every front – eased monetary policy, tolerance of currency depreciation, a stimulus for bank lending, and infrastructure projects – to boost growth so that it does not move far from the 6% target, a baseline compatible with an acceptably resilient labour market.
Thanks to the monetary policy of a preventive easing that the leading central banks will undertake (a policy entirely justified by the deteriorating inflation-free economic outlook and the multiplication of sources of concern and financial turbulence), our scenario can outline a substantial slowdown but not a collapse in growth.
Above and beyond the messages signalling the coming easing from the Federal Reserve and the ECB, the central banks are thinking about their medium-term monetary strategy and seem on the point of inventing “a new wisdom for a new age” (J.M. Keynes, 1925). What with accommodative central banks thinking about their mandate and the appropriate tools for fulfilling it, risk aversion, an inflation-free economic slowdown what we have is an environment where long-term interest rates seem set to stay low for a very long time..