Global economic outlook 2020: The rocky road to recovery

Our global chief economist plots the year ahead for banks around the world

Global economic growth is soft but stabilising in 2020 following a year in which escalating trade tensions and other uncertainties put the brakes on. While there are reasons to be optimistic about the growth prospects for emerging markets, particularly those in Asia, economies in Europe will likely struggle to gain momentum.

Global gross domestic product (GDP) will grow at a subdued but stable 3.3 per cent in 2020, according to Standard Chartered’s Economic Outlook 2020 report. This outlook depends largely on what happens in Asia as we estimate economies in the region (excluding Japan) will contribute 69 per cent of global GDP growth. Without this contribution, our global growth forecast would drop to 1 per cent. Fortunately, we believe there are reasons to be more optimistic than the market consensus about the region’s economic prospects.

China remains a key driver of global growth

We expect that China, the biggest single contributor to global economic growth, will set a GDP growth target of around 6 per cent for next year and provide policy support for a slightly higher rate. This view is contrary to the market consensus, which sees China achieving less than 6 per cent growth, but we believe it is justified. The government will need to ensure growth of at least 6.1 per cent in 2019-20 if it is to realise its politically important goal of doubling GDP in real terms between 2010 and 2020, according to our calculations.

One of the main threats to China’s economic growth is the country’s ongoing trade war with the United States. While it is difficult to predict how the dispute will play out in the near term, both sides stand to gain from reaching a deal to lower trade barriers. Donald Trump, in particular, can ill afford to risk a recession ahead of the 2020 US presidential election and trade policy is the main tool he has at his disposal for spurring growth. Indeed, since our 2020 Outlook report was published, the US and China have confirmed that they have concluded a “phase one” trade deal which involves the US reducing some tariffs and suspending new tariffs that were due to take effect on December 15.1 While the trade war won’t be resolved overnight, we expect its negative effects to be offset by positive factors including increased infrastructure investment supported by fiscal spending, faster project approvals, and the lowering of the project capital requirement.

Signs of recovery in South Korea

Another major Asian economy, South Korea, will see GDP growth of 2.2 per cent next year, according to our analysis. This is slightly lower than our previous forecast of 2.4 per cent, reflecting weaker-than-expected export momentum so far, but it is still above the market consensus of 1.9-2 per cent. The country’s exports are still in decline, but the latest data (for the first 20 days of November) show that the rate of decline has slowed to 9.6 per cent from 19.5 per cent the previous month, a sign that economic conditions are improving. There are other indicators of recovery, including an improvement in the manufacturing capacity utilisation rate and a modest climb in retail sales.

Aside from the shrinking export sector, the main risk to South Korea’s 2020 growth is weak construction investment, exacerbated by tight housing-market regulations. We believe that this will be offset by the government’s decision to increase the infrastructure investment budget for next year by 12.9 per cent, a move which should boost the civil engineering sector.

Reasons for optimism in South Africa

Moving away from Asia, we anticipate GDP growth of 1.8 per cent in 2020 and 2 per cent in 2021 for South Africa. These growth rates, though sluggish, are slightly better than those predicted by the government and the South African Reserve Bank. Our 2020 forecast takes into account a likely rise in consumption following years of household balance-sheet repair, improving confidence and private sector-credit growth, and a pick-up in investment from exceptionally weak levels.

Better but still below consensus for the euro area and UK

Meanwhile, the 2020 economic outlook for the euro area and the UK has improved slightly on reduced fears over global trade and Brexit. Our GDP growth forecasts for the two economies have been upgraded to reflect this more positive outlook but they remain below the market consensus.

According to our calculations, the euro area’s GDP will grow by 0.9 per cent next year (previously 0.7 per cent). The risk of a “no deal” Brexit in January has subsided and it looks unlikely that the US will implement planned tariffs on European cars.2 However, exogenous threats remain, including uncertainty over trade relations with the UK and slower growth in the US and China, causing us to revise our 2021 growth forecast downward from 1.2 per cent to 1 per cent.

Meanwhile, we have lifted our 2020 growth forecast for the UK from 0.5 per cent to 1 per cent to account for the diminished risk of an imminent hard Brexit. We’ve also raised our forecast for 2021 from 1 per cent to 1.2 per cent to reflect our expectation that fiscal stimulus measures will alleviate some of the headwinds that will likely emerge in the aftermath of the UK’s departure from the European Union.

Prolonged Brexit uncertainty has weighed on the UK economy, dampening business sentiment and consumer confidence. Negotiations on the future of the country’s trading relationship with the EU will be difficult and there is still a risk that the two sides will be forced to trade on WTO terms, to the detriment of the UK’s economy. That said, the prospects of a smooth withdrawal from the EU at the end of January appear to have improved. If the UK and EU can work out a trade deal next year, this will help alleviate uncertainty over the UK’s economic future.

New decade, new challenges

Throughout the past few decades, the global economy has seen healthy growth supported mainly by emerging economies in Asia. As the world moves into the 2020s, the main risks to growth will include debt burdens in several major economies, notably China and India; worldwide demographic declines; and rising anti-globalisation sentiment and protectionism. The long-term future of the global economy will depend on how these challenges are addressed. And, increasingly, it will be emerging markets setting the agenda.

This article was also published in Bankable Insights Issue 12.

1 https://in.reuters.com/article/us-usa-trade-china/u-s-china-trade-deal-cuts-tariffs-for-beijing-promise-of-big-farm-purchases-idINKBN1YH1SA

2 https://www.reuters.com/article/us-usa-trade-autos/trump-can-no-longer-impose-section-232-auto-tariffs-after-missing-deadline-experts-idUSKBN1XT0TK

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