The clouds over 2020

The world economy, according to the official declarations at the IMF and the World Bank’s annual meetings in Washington early this week, is not getting into a recession. Yes, the 3 per cent global growth this year is the lowest since the 2007 financial crisis but 2020 is expected to be better with overall growth rising to 3.4 per cent. However, the fact is that since the beginning of the year, we have seen a steady deterioration of economic prospects all over the globe. The last few months have brought us an avalanche of downgraded forecasts from all international and private sector financial institutions and think tanks.

In fact, there are some good reasons to consider that we may see an additional deterioration of the economic environment in the next few months: Germany’s Bundesbank has now officially recognised that the country — the largest European economy — has slumped into recession, its export industries being badly hit by the slowdown in China and by the uncertainties over Brexit. In the US, economic growth has decreased from 2.9 per cent in 2018 to something around 2.2 per cent this year, and many analysts expect that 2020 could see some periods of contraction in activity. China, which has been a key driver of global growth over the last 20 years, is now struggling to sustain growth at 6 per cent — its lowest performance in the last 25 years — as it continues to reduce financial risks created by shadow banking and mitigate the impact of the trade war with the US. Japan, which had seen earlier this year a burst of activity, is now slowing down as its exports have been declining over the last 11 months.

Ask any analyst or policy-maker about the reasons for this global synchronised economic slowdown, and the first answer will be: The impact of the trade war launched by the Trump administration against China and, more generally, the way it has weaponised trade — creating uncertainties, which are paralysing many investment decisions. 

The second answer will be the impact of geopolitical and political risk almost everywhere around the world, whether it is the mind-boggling whirlwind of developments about Brexit, with the prospects of a deal between London and Brussels changing almost on an hourly basis; or the daily questions about the contents of the latest rambling tweets of Donald Trump and their potential impact on markets; or the next developments in the impeachment process now in full swing in Washington; or the impact of the $7.5 billion of tariffs that the US will impose on its imports from the EU as a result of the WTO ruling about the European complaint on American unfair subsidies to Boeing. But don’t hold your breath as the WTO is also expected to rule on a similar complaint from Boeing about unfair subsidies to Airbus, and the EU will be entitled to raise tariffs on some American exports. And then, of course, there are the risks of new disruptions of oil production in the Gulf, after the drone attacks that cut the Saudi oil output by half in September.

However, there are some basic economic reasons to the present downturn: We are obviously seeing in the US the end of the longest cycle of expansion in modern history, which was prolonged by the tax reform of the Trump administration, acting as a fiscal stimulus whose impact is now fading away. China, for its part, has reached a stage in its economic rise where double- digit growth cannot be expected anymore. As the country shifts to a new economic model based more on technological innovation, domestic consumption and environment preservation, real growth rates of around 5 per cent might become the norm. So, don’t count on China to play the role it has played over the last 20 years as the global growth driver of last resort. Or, at least, not to the same extent.

Germany is confronted with the need to review an economic model that has been relying too much on exports, on an automotive industry now struggling to move away from fossil fuels and on wage compression. There is now a belated wake-up on the urgency to revisit the concept of mandatory balanced budgets to update an infrastructure which is crumbling not only when it comes to roads and bridges but also with respect to IT, and to devote more resources to fighting climate change. Germany is way behind in terms of meeting its stated objectives of CO2 emissions reduction.    

So, it is not surprising that the possibility of a recession in 2020 is part of the scenarios developed in many corporations, financial institutions and ministries around the world. A major concern is that if such a possibility were to materialise, we will be, globally, in a much weaker position to  address it. The fact is that the margin of maneuver for using monetary policy to stimulate activity is now extremely thin as quantitative easing for the eurozone and for Japan is definitely in a phase of fast diminishing returns, and in other countries very low — or even negative — interest rates do not allow for much of an impact in using them as a tool. Add to that the fact that low interest rates in the last few years have led to a high increase in corporate and national debt all over the world. 

The last lever left will be fiscal policy measures to stimulate economic activity. But then the challenge will be to calibrate these measures to avoid the excesses of the past, and to select initiatives that will be able to bring quick results.
 

The writer is president of Smadja & Smadja, a Strategic Advisory Firm@ClaudeSmadja