Global Macro Outlook - October 2019

Key Forecast Trends

The global economy is moving into a period of protracted weakness in which growth is likely to remain positive but significantly lower than potential.

Central banks are alive to the risk that weak growth might turn into a deeper and more damaging downturn. The Fed and ECB have eased policy in recent weeks, and we expect more of the same over the coming year.

One of the keys to the 2020 outlook is policy effectiveness. We are confident that Chinese policymakers will be able to prevent a destabilizing slowdown in growth and are hopeful the Fed can do likewise. But we’re more worried about Europe and Japan, where monetary policy may already have run out of road.

Many see fiscal policy as the answer, and we’ve long thought that’s where the world is headed as it grapples with high debt and weak secular growth and inflation. For now, though, we’re skeptical that the fiscal response will be aggressive enough or broad enough to change the business cycle for the better.

The result: central banks are still on the hook as the global economy weakens. This means more policy easing and low (or lower?) interest rates for the foreseeable future.

Outlook

We did not change our 2020 global growth forecast this month. But we did sharply downgrade our expectations last month and now expect the world economy to grow by 2.3% next year, which will make 2020 the weakest year of global growth since 2009 (when it contracted by 2.0%).

We are most concerned about high-income, trade-sensitive economies like the euro area and Japan. We expect the euro area to grow by just 0.3% next year and Japan to contract by 0.4%. Both are well below consensus—1.0% for the euro area and 0.3% for Japan. We are also slightly below consensus on the US (1.5% vs. 1.7%) but in line on China (6.0%).

The secular backdrop still points to higher inflation. But cyclical developments clearly point in the opposite direction, and we expect global inflation to fall to 2.7% in 2020 from 2.9% this year.

Monetary easing is under way and likely to continue. We expect the Fed to cut rates by another 100 basis points (b.p.) and the European Central Bank (ECB) to announce an additional rate cut and more aggressive asset purchases.

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Global Macro Outlook - October 2019

What You Need to Know

Key Forecast Trends

Outlook

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