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WORLD – Macroeconomic Scenario for 2019-2020 - Keeping heads above water, just about...


While the major economies are not harbouring the classic excesses (including inflation) that inevitably announce the sharp downturn in the growth cycle, they are all on the path to slowdown to some extent or another. Still-robust domestic fundamentals are up against declining foreign demand and widespread uncertainty that has already proven costly in terms of growth.



The slowdown in global trade in goods is obvious and was made clear by the World Trade Organization’s most recent forecasts. After increasing by 4.6% in 2017 and 3% in 2018 (with GDP growth rates, in volume terms, standing at 3% and 2.8%, respectively), global goods trade is only expected to gain 1.2% in 2019 (compared to a forecast of 2.6% in April), before recovering in 2020 provided that trade relations return to “normal”. This forecast is shrouded in serious uncertainty(1) and the risks are clearly to the downside. Hopes of seeing trade begin to recover hinge on trade disputes, geopolitical tensions and financial volatility all dissipating (or at least becoming less acute). However, although we can be hopeful of some respite, nothing suggests a return to lasting calm. Unfortunately, the persistent trade, political and geopolitical confrontations are now major factors in our scenario.

In the United States, despite a decline, job creations should be sufficient to stabilise the long-term unemployment rate and underpin consumption when import tariffs are applied to consumer goods. However, growth in household savings is expected to falter and, coupled with the declines in investment (which is already very evident) and external demand, cause growth to drop from 2.3% in 2019 to around 1.3% in 2020, although a recession will be avoided.

In the Eurozone, external risks(2) are also being countered by solid domestic demand, in particular household consumption. Although employment and income are still holding up, the trade-off between spending and saving will ultimately have to become the focus. The recent increase in the savings rate confirms that very low interest rates are not demotivating. More generally, a very low interest rate is a key factor, but certainly not the only one; a condition that permits but does not drive consumption and investment decisions. The (fragmented) growth in the Eurozone is expected to dip slightly in 2020 (to 1.1%, from 1.2% in 2019), and will particularly impact the countries that are the most open, but also the most exposed to the industrial sector.

The emerging markets, which are falling victim to slowdowns in their exports (which are in turn dragging down productive investment), will face the global slowdown in an environment of widespread monetary policy easing. The combined effect of reducing financial pressure and emerging-market inflation that is generally under control should help these countries to ease their own monetary policy. This is a vital shock absorber but one from which we should not expect a sharp recovery in activity. In China, the curbs on exports imposed by the trade war with the United States and the global slowdown are combining with previous efforts to reduce debt and restrictions on demand for vehicles and housing. Although China’s monetary and fiscal resources will contain this slowdown and guide (annual average) growth in 2020 to around 6%, a brief dip below this level in late 2019 is not out of the question.

Accommodative monetary policy is therefore the name of the game, more so than ever given the need to guard against the risks inherent to this unprecedented, primarily uncertainty-driven late cycle. However, some dissenting voices are already getting louder, particularly about financial bubbles being formed as collateral damage, while others are reiterating that monetary policy easing has reached its limits and will have to be supplemented by fiscal policy.

Some members of the Federal Reserve were opposed to the recent rate cuts, highlighting the solid outlook, strong consumption and fears over financial stability. In contrast, others have called for greater easing of monetary policy, citing the extent of the downside risks caused by tensions over trade, the slowdown in global growth and weak inflation. With inflation firming up and economic statistics that remain satisfactory, despite slowing down, any additional monetary policy easing in 2019 is expected to be limited. In 2020, based on our scenario of a sharper downturn in growth, the Fed is expected to cut rates twice more in order to avoid a recession. A precautionary approach is expected to be favoured (or will prevail?).

In the Eurozone, the ECB is using all the tools at its disposal in its attempts to meet the varying needs of its different member states. Through its “all-out” easing policy, the central bank is demonstrating its intention and ability to mitigate the slowdown in the short term. However, it is not hiding its concerns over the ability of monetary policy to single-handedly underpin growth, and therefore aggregate demand. Fiscal policy will have to play a role from now on too.

The central banks and financial markets seem to be involved in a game of toxic co-dependence. Against a backdrop of concern fraught with doubts over the scale of the economic slowdown (and even the pace of growth over the longer run), the central banks are acceding to pressure from the markets to ease monetary policy.

They cannot allow negative wealth effects to exert pressure on consumers and even push them towards rebuilding their savings. This benevolence will lead the (divided) Fed to remain flexible and limit the upside pressure on long-term interest rates. In the Eurozone, powerful structural factors combined with a sluggish economy and a highly accommodative monetary policy will continue to drag core interest rates down to historically low, even more negative, levels while reducing peripheral countries’ risk premia. Nothing is suggesting that “normalisation” will be a quick process.

Against a backdrop still fraught with risk aversion, the varying pace of monetary policy easing is expected to enable the dollar to maintain its strength. As such, the U.S. dollar is likely to continue to benefit from its position as a safe-haven, high-yield currency, at least until the slowdown takes a firmer hold in the United States (mid-2020).



Catherine Lebougre - Catherine.lebougre@credit-agricole-sa.fr




(1) Uncertainty reflected in the size of our forecast range. With global GDP growth in volume terms at 2.3% in 2019 and 2020, forecasts for growth in global trade are in the 0.5% to 1.6% and 1.7% to 3.7% ranges, respectively.

(2) Our central scenario still incorporates the assumption that a no-deal Brexit can be avoided in the short term (via a further extension and early elections in the United Kingdom). Nonetheless, we detail the impact of a “hard Brexit” on the UK and the Eurozone in a Focus. 

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