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Positive inflection

While some remain fearful of recession, we anticipate growth picking up modestly in 2020. But think green shoots rather than notable rebound…

In our view, investors remain too fearful of a global recession and we expect a modest pick-up in growth in 2020. The easing in monetary and financial conditions and a moderation in the drag from the US-China trade war should support growth in 2020.

The credit impulse in China is now positive and is likely to be backed by further fiscal and monetary support with the inventory cycle in manufacturing turning from a headwind to a tailwind for global trade and growth.

Although we expect a more subdued bounce-back than from the 2015-16 slowdown, a positive inflection in global growth should dispel recession fears with meaningful implications for markets.

 

Easing in global financial conditions set to boost global growth

Easing in global financial conditions set to boost global growth

 
Note: As of 10/30/2019. Real GDP growth impulse from Goldman Sachs (GS) World Financial Conditions Index based on GS estimates of impact of FCls on GDP growth, with the assumption that financial conditions remain the same for the rest of the year and the following quarters. Source: Goldman Sachs, Bloomberg, RBC GAM

 

Much depends on a US-China trade deal for business sentiment and investment to improve and for the Trump administration to refrain from ratchetting-up trade tensions with the EU, as it has threatened to do.

The escalation in the US-China tariff war and trade policy uncertainty has had a meaningful downward effect on global trade and investment, although the coincidental cyclical slowdowns in autos and semi-conductors, and tightening in global monetary conditions in 2018, also played a big role.

If the anticipated US-China ‘phase one’ trade deal does not materialise, further tariffs and the adverse impact on financial conditions and business investment could de-rail the recovery.

And trade is not the only source of uncertainty as the race for the US presidency heats up.

Signs of growth stabilisation in China are tentative at best and the risk of policy error by Beijing in providing insufficient stimulus cannot be wholly discounted.

 

We do not expect a repeat of the notable rebound in growth as occurred after the last global recession scare in 2015-16. Investors are likely to remain cautious until economic data provides greater evidence that the ‘green shoots’ of recovery are firmly established.

 

Manufacturing downturn has troughed

Manufacturing downturn has toughed

 
Source: IHS Markit, China Federation of Logistics & Purchasing 11/2019, 11/2019, 11/2019

 

The US Federal Reserve’s (Fed) dovish pivot has effectively eased monetary conditions by an equivalent of 150 basis points (bps), with Treasury yields moving from reflecting an expected peak in policy rates of around 3% to current expectations of just 1.5%.

The travails of the shale oil sector have contributed to the decline in US business investment, but along with some easing in trade-related uncertainty, it should be less of a drag in 2020.

Lower mortgage rates are boosting household incomes and driving a pick-up in housing starts. Real wages are rising and jobs growth remains at a pace that should continue to reduce unemployment.

So long as the labour market remains strong, then we believe the US consumer will prevent the US economy from stagnating.

 

The Fed's 'dovish pivot'

The Fed's Dovish Pivot

 
Note: US dollar OIS forward rates at 3 October 2018 and 22 November 2019. Source: Bloomberg, latest data at 22 November 2019

 

The latest eurozone economic data suggests that conditions in the industrial sector are improving.

Fiscal policy is mildly expansionary in 2020, but the reluctance of German policymakers to use ample fiscal space to boost spending remains a source of downside risk, in our view, with monetary policy near the point of exhaustion.

The shadow of a ‘no deal’ Brexit has at last been dispelled, although uncertainty over the post-Brexit trading relationship with the EU persists. Irrespective of the outcome of the current UK general election, public spending and borrowing is set to rise.

We predict growth in Japan will remain below 1%, as in Europe, monetary policy has largely exhausted its ability to further boost growth and inflation.

China growth is on a secular downtrend and greater import substitution means its contribution to global demand will likely diminish over the medium-term.

But in the near-term, a ceasefire in the tariff war with the US, easier credit and monetary conditions and a pick-up in infrastructure spending should drive a sequential pick-up in growth in the first half of 2020 that will also support activity across East Asia.

The latest IMF forecasts predict a recovery across the major emerging market economies, notably India, Russia, Mexico, Brazil, Russia and Turkey, helped by stable commodity prices and a pick-up in global manufacturing and trade.

 

The inventory drawdown is coming to an end and is likely to make a positive contribution to growth in 2020 as sales pick-up in key sectors.

An increase in infrastructure spending at the turn of the year as well as a positive credit impulse, albeit modest by previous standards, will support a stabilisation of Chinese growth in the first part of 2020.

The easing of monetary and financial conditions from the dovish pivot by global central banks, led by the Fed, is also supporting global activity.

 

China growth will follow positive inflection in credit impulse

China growth will follower positive inflection in credit impulse

  
Source: People’s Bank of China; BlueBayAsset Management calculations; latest quarterly data for Q3 2019

 

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