Research

Global growth bottoming out?

Global economic growth continued to ease during the fourth quarter.

January 07, 2020

The likelihood of a global recession remains relatively low, but not zero. Numerous risks persist while new ones continue to emerge which could put pressure on growth this year.

Growth for 2019 should register roughly 2.5%, though actual figures will publish later in 2020. That would represent the slowest rate of growth since 2009 when the economy contracted during the Great Recession. Declining global trade and softening industrial production hampered global growth in 2019. Though not solely responsible, the escalating trade war between the U.S. and China produced significant collateral damage, slowing growth in various national economies around the world. Other assorted geopolitical risks and tensions exacerbated the slowdown by creating fear and uncertainty that restrained economic activity.

Growth appears to be bottoming out in early 2020. The economy likely turned the corner on the slowdown in trade and manufacturing activity. Yet even the services sector is showing signs of softening heading into 2020. On the whole, the combined impact of stabilizing manufacturing activity coupled with weakening in services should produce a relatively unchanged growth rate, holding steady near 2.5%. The likelihood of a global recession remains relatively low, but not zero. Numerous risks persist while new ones continue to emerge which could put pressure on growth this year. Barring a significant idiosyncratic shock or too many risks materializing at once, economic growth should remain comfortably above stall speed.

Geopolitical risk remains elevated

Geopolitical risk should continue rising to its highest level in decades in 2020, surpassing the level from 2019. During 2019 new geopolitical risks continued to sprout up, seemingly on a near-continuous basis, without existing risks and issues getting resolved. As attention capriciously shifted from one risk to the next, the world ignored (or at least deemphasized) prior risks that remained unresolved or at least unmitigated. That list of risks grew too lengthy to enumerate, but some key ones continue to command attention. Tensions in the Middle East morph and change, the most recent iteration being escalating tensions between the U.S. and Iran, which could become highly incendiary. The ongoing trade conflict between the U.S. and China should continue to drag on economic growth, despite the tentative “phase one” agreement reached in December. Tariffs remain elevated and the deal does not address more substantial disagreements. The deal likely will not alleviate uncertainty and negative sentiment from businesses, which should continue to restrain investment.  Domestic politics in the U.S. remain fraught with impeachment and a pivotal election lurking in November. Relations between the U.S. and North Korea have reversed in recent weeks. Brexit became somewhat more transparent in December, but uncertainty over timing and specific plans remain. Protests of various kinds continue around the world in virtually all regions. Populism remains palatable in many places around the world. These developments alone should not cause much economic fallout, but they hold the potential to cause or exacerbate problems.

Global inflation should continue to hover at low levels, enabling low rates to persist throughout the year.

Government policy should remain limited

Government policy should not have a large impact in 2020. Monetary policy should remain rather ossified, particularly among a few major central banks such as the U.S. Federal Reserve (Fed), the European Central Bank (ECB), and the Bank of Japan (BOJ). The Fed cut 75 basis points (bps) in 2019 and claims that they are likely to remain in a holding pattern. The ECB only marginally lowered rates last year but has very little room to maneuver remaining with rates already so low (even negative in some member countries). The BOJ remains constrained by negative interest rates in Japan. The Bank of England (BOE) retains some ability to cut rates if it deems them necessary. The Bank of China (BOC) is trying not to intervene too heavily in the economy. Yield curves around the world have steepened in recent periods, leading some to believe that central bank intervention in 2019 proved successful. Yet that ultimately remains to be seen. Global inflation should continue to hover at low levels, enabling low rates to persist throughout the year.

This business cycle will not likely repeat the previous business cycle with asset markets pulling the economy downward.

Fiscal policy should also remain muted in 2020. Despite interest rates near historically low levels and the need for public spending (particularly in infrastructure), the prospect seems distant in many countries. Some governments do not have the desire to embark upon a significant spending program while others lack the ability to produce any sort of fiscal stimulus because of existing concerns surrounding outstanding debt and deficit issues. In a handful of others, politics and decisions about the source of funding hamper the process. In sum, fiscal spending will likely not provide much of a boost to the global economy this year.

Lofty asset valuations persist

The year 2020 begins with valuations across virtually all asset markets at or near record-high levels. Concern is growing that prices are becoming divorced from business and economic fundamentals. While the situation should not necessarily be characterized as a bubble, lofty valuations sitting atop modest business and economic fundamentals pose some risk. This business cycle will not likely repeat the previous business cycle with asset markets pulling the economy downward. But asset markets remain a significant leading economic indicator, typically turning down before the macroeconomy. Further increases in asset valuations could, at a minimum, increase volatility.

The prospect of greater government spending will likely increase in 2021 after the election.

Widespread slowing in key countries

In the U.S., momentum in the economy is slowing. Growth for 2019 should register roughly 2.3% on an annualized basis, in line with the average during the current economic expansion. Growth should slow toward 1.8% in 2020. The worst of the weakness in private investment that held the economy back in 2019 likely already occurred, but a significant rebound looks a distant prospect due to ongoing trade policy uncertainty and lack of business confidence. Fiscal stimulus should not play a big role in the economy during an election year with an uncertain outcome. The prospect of greater government spending will likely increase in 2021 after the election. And net exports should remain somewhat limited in its ability to positively impact the economy amidst the ongoing trade ware. That leaves consumer spending as the lone driver of the economy. Yet consumer spending looks set to slow with the employment growth rate slowing over time. That labor market will remain a key driver of economic performance in 2020, much like 2019. Elevated political risk during an election year remains a known variable that could prove troublesome.

In China, the world’s second-largest economy, economic growth slowed in 2019, likely to its weakest rate since 1990. The economy was buffeted by external factors, namely the trade war with the U.S. Growth perked up in recent months, though this nascent rebound seems modest. The phase one trade agreement with the U.S., set to be signed in January, should provide a minor boost to economic growth. The labor market continues to fare well providing the government with less incentive to implement any stimulus. The growth rate for 2020 should hold steady near 2019’s rate, but the risk of renewed trade tensions with the U.S. and political risk at home add elements of unpredictability.

Japan continues to get caught in the crossfire between the U.S. and China. The uncertain global outlook (namely via international trade), coupled with weak domestic demand (due to tax hikes), dampened growth. Amidst this environment, business sentiment remains weak, led by manufacturers, with services companies feeling somewhat more optimistic. To be fair, similar dynamics appear in other countries, notably the U.S.  Looking forward, businesses expect the environment to improve and are planning to continue investing. The government also recently announced a stimulus package whose amount overstates the boost it could provide, but nonetheless should at least limit the downside to growth. Despite these moves, economic growth should slow toward stall speed in 2020 due to the impact of a consumption tax hike slated for this year.

Economic growth in India continued its substantial slowdown during the latter half of the year, pulled downward primarily by manufacturing. The services sector head steady. Some government spending coupled with substantial monetary policy stimulus from the Reserve Bank of India (RBI) implemented in 2019 should produce somewhat stronger growth in 2020. Private sector activity looks to remain somewhat disappointing which should limit the upside in any anticipated growth rebound.

In continental Europe, the industrial sector appears to be nearing its nadir in Germany. The auto industry, a key to Germany’s export powerhouse, seems on the verge of a recovery in late 2019 and early 2020. The international trade environment continues impeding the economy’s performance, which should keep growth in 2020 in line with growth in 2019. In France, a stronger consumer helped propel the economy in the latter half of the year, but growth will remain challenged in 2020. Government plans to pass pension reforms brought protests in 2019 which hampered the economy. These could persist this year, potentially threatening growth once again.

In the U.K., the conservative victory in the general election in December should result in the ratification of the Brexit withdrawal agreement on January 31. Yet, negotiations for a trade deal with the European Union could prove challenging and the threat of a no-trade-deal Brexit remains. That would likely result in the erection of trade barriers, likely reducing economic growth. Given the uncertainty, economic growth in 2020 should mirror the relatively weak growth from 2019. The government could implement some fiscal stimulus if growth disappoints, but the prospect of that remains unclear.

In the Americas, the Canadian economy followed a strong second quarter with softening in the third and fourth quarters. Growth should slow further in 2020 amidst ongoing global trade disputes and weak domestic demand. Fiscal and monetary stimulus could support the economy next year if slowing accelerates too much. In Brazil, revisions show that economic performance exceeded expectations in 2019 and improved the outlook for 2020. Nonetheless, various factors such as outstanding debt, problematic demographics, and weak savings continue to hold the economy back. In Mexico, the central bank, Banxico, continued cutting rates throughout 2019 to help prop up the economy. Yet, inflation remains stubbornly high (particularly core inflation) and minimum wages are increasing, which monetary loosening could worsen, potentially risking real growth.

Implications for the U.S. economy and CRE

Despite the longest expansion in history, the U.S. enters 2020 with an economy characterized by weak private investment, a slowdown in consumer spending, and very limited appetite for government spending. With the domestic components of the economy constrained, the global environment could produce an outsized impact. But the risks lie to the downside. Trade policy remains restrictive, pulling back on growth. Slowing growth in many key economies around the world limit demand for U.S. goods and services. And the highest level of political risk in decades, a lot of which is the direct result of U.S. policy decisions, increases the probability of idiosyncratic factors breaking the wrong way and disrupting the economy.

For commercial real estate (CRE), 2020 looks like another year when the CRE market will have to ignore some external factors. Thus far we have seen little direct fallout from policy decisions and geopolitical risks on the sector. Yet those headwinds could intensify, presenting greater obstacles for CRE than in 2019. Global economic growth typically holds an indirect effect on domestic CRE, so we only expect marginal impact from slowing. Yet any potential upside appears limited. Overall, we expect another positive year for CRE in the U.S. but see little support from global factors. Modest domestic drivers will have to propel the sector in 2020.

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