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Economics Commentary

Global Macro Outlook - December 2019

09 December 2019
2 min read

What You Need to Know

Our experienced global team of economists offers its latest perspective on the world economy. Included are regional and country forecasts for growth, inflation and interest rates, updates on central bank and fiscal policies, and the upside and downside risks that could change the trajectory.
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Key Forecast Trends

  • Financial markets continue to be buoyed by signs of an extended truce in the US- China trade war and tentative signs that manufacturing—a sector that has single- handedly dragged global growth lower—may finally be starting to stabilize.
  • But stabilization is not the same as recovery, and it’s important to note that the most recent survey data, including the closely watched manufacturing PMIs, still point to contracting industrial output. It would be premature to rule out a spillover into rising unemployment, falling investment and a deterioration in the broader economy.
  • Nor are we convinced that recent developments on the trade front will lead to a spontaneous recovery in output. That’s partly because of the lingering risk of failure but also because it will take more than a fragile truce to lift the cloud of uncertainty weighing on global output—particularly with new populist risks forming on the horizon (including the US presidential election).
  • While the outlook may have brightened in recent weeks, it has not done so sufficiently for us to change our baseline view. We expect global growth to remain weak, inflation to remain subdued, policy rates to remain at record lows (or move even lower) and bond yields to trade in a narrow range around current levels.
  • With monetary policy having reached the end of the road, fiscal policy offers the best hope of breaking out of this low-growth and interest-rate regime. But while there are emerging signs of a shift in this direction, we’re still a long way from the large-scale, proactive fiscal stimulus needed to transform the outlook.

Outlook

  • Our baseline forecast is for global growth to remain weak, inflation to move sideways, and policy interest rates to remain at current ultralow levels or move even lower.
  • We expect the global economy to grow by just 2.2% in 2020, which would be the weakest growth since 2009. Compared with consensus, we’re a bit more pessimistic on the US (1.5% growth next year vs. 1.8%) and China (5.8% vs. 5.9%) but much more pessimistic on the euro area (0.3% vs. 1.0%) and Japan (-0.4% vs. 0.3%). This reflects our continued concerns about trade-sensitive economies with limited policy flexibility.
  • The secular backdrop still points to higher inflation. But cyclical developments point in the opposite direction; we expect global inflation to fall to 2.7% in 2020, from 2.8% this year.
  • We expect the Fed to cut interest rates by another 75 basis points (b.p.) and the ECB to announce an additional rate cut and more aggressive asset purchases. But uncertain reaction functions mean our conviction level is lower than it was.

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