Risks recede - growth on a better trajectory
Having declined for the past 18 months, global growth is expected to reach a low point at the end of 2019, before gradually improving over the course of 2020 (Figure 1).
Figure 1. Global growth outlook (y/y)
We expect global growth to improve through 2020
While we do not expect growth to rise above potential through 2020, there is a slightly better growth outlook than we had previously expected. That said, in the context of "mid-cycle" growth recoveries, it would be considered modest.
But for asset markets, perhaps more significant than the improvement to the growth outlook is the view that the probability of a severe downturn or recession in 2020 has receded. This reflects a more constructive near-term view on the trade dispute between the United States and China.
At the time of writing, the text of a "Phase 1" deal between the US and China had been agreed by both sides. That included the US cancelling 15 per cent tariffs on about $150bn of Chinese goods that were due on December 15 and halving the tariff rate to 7.5 per cent on goods worth about $120bn which came into effect in September (while tariff of 25 per cent on around $250bn in Chinese imports remains in place). In exchange, the Chinese also cancelled tariffs that were due to be implemented on December 15 and agreed to substantially increase their imports of US agricultural, energy and other goods and services over the next two years, as well as tighten laws on technology transfer and intellectual property rights.
The agreement of a Phase 1 deal marks the first time that tariff rates have been reduced between the two economies since the dispute began in 2018.
Should this truce persist, it is expected to improve sentiment globally, reversing the sharp slowing in business investment seen across many major economies. It should also prevent the past weakness in the manufacturing sector (which is very sensitive to developments in international trade) spreading more widely into the much larger services sector.
However, as we saw through 2019, any truce in the trade war could prove to be fragile, with the potential for any number of factors related to the geopolitical and economic relationship a potential trigger for re-escalation. Moreover, we continue to expect strategic competition between China and the US will be an important factor in global economic developments for many years to come, irrespective of who occupies the White House.
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