Precarious situation ahead for 2020

IT’S the time of the year. The year 2020 begins in four weeks.

In a word, the economic outlook is precarious; indeed, rather lousy. International Monetary Fund’s (IMF) October World Economic Outlook (WEO ’19) forecasts point to some global recovery in 2020, with growth rising at 3.4% (against 3% in 2019), after a year when for the first time in a long time, world trade rose at a slower pace than world growth (1.1% against 3%).

This is serious. World trade contracted in the third quarter of 2019 (3Q19), making the fourth consecutive year-on-year contraction and the longest period of fall since 2009. With the trade war still largely unsettled, uncertainty is expected to linger. A 2020 rebound is now not on the cards. There aren’t too many bright spots left.

Not surprisingly, for most, the global economy appears to be in a synchronised downturn, reflecting the consequence of rising trade barriers, elevated uncertainty surrounding geopolitics, including Donald Trump’s continuing schizophrenic routines.

These have caused, in particular, strains in many emerging market economies (EMES). In addition, a number of structural factors are at play, such as low productivity growth and ageing demographics in both advanced economies (AES) and EMES. True to form, I expect the IMF to be off the mark once again – too optimistic amid continuing weakness in Europe and Japan as well as among the BRICS (Brazil, Russia, India, China and South Africa).

Moreover, continuing uncertainties and idiosyncratic factors are causing macroeconomic disruption in manufacturing and global supply chains, tilting global growth downwards much more than is expected by the IMF.

All of these occurring at a time when monetary policy has been spent stimulating demand across both AES and EMES. Latest data for September/october have not been encouraging. The Trump factor remains a gathering risk, even though no one expects the US Congress to, in the end, impeach him. Still, rising trade and geopolitical tensions will take its toll on business confidence and on investment decisions. That said, at best, the recovery envisaged by the IMF is precarious.

Recession?

The Imf/world Bank annual meetings in October concluded that the global economy is not slipping into recession. IMF broadly defines a world recession as growth falling below 2.5% a year. Its forecast expects a pick-up next year – most think that to be optimistic. Even its new managing director quoted the Russian poet Pushkin to capture broad-based concerns: “The breath of autumn begins to ice the roadway.”

Also, “the global economy is now in a synchronised slowdown”. Others describe the situation as “synchronised stagnation”.

Indeed, the global economy is experiencing its weakest performance since the 2008/09 financial crisis. The trade wars are adversely affecting business confidence, investment, trade and manufacturing. The mood among the global Big 4 (United States, China, Europe and Japan) is gloomier in 4Q19 than at the beginning of the year.

Large EMES, including China and India, are growing increasingly anxious, as is Europe. Improvements remain an expectation. Still, large corporates and think tanks caution it is too early for recession to set in. But IMF forecasts can easily be knocked off course by further tit-for-tat tariffs. Over the medium-term, IMF predicts the Big 4 will see no real improvement in growth.

The United States: Growth has slackened – up 1.9% in 3Q19 (down from 2% in 2Q19 and 3.1% in 1Q19). The pullback is expected to continue (expecting 1.5% in 4Q19, the slowest since end-2018 when it was 1.1%). Consumer spending has helped to offset faltering business investment which fell sharply in 3Q19. Also, the upturn in the services sector was relatively muted by historical standards, as US corporates remain cautious about the outlook. This reflected, in part, heightened trade uncertainty that has delayed investments, especially in manufacturing. Leading sectors such as autos and electronics have faced challenges, including tighter emissions standards.

Although the stock and bond markets have done well in 2019, they are set for a tougher time in 2020 as Fed and budget stimulus loses its “oomph”. Also, the stimulus effects of tax cuts and reforms have fully worked their way through the system. Still the political environment is “mercurial”. Too uncertain about what Trump might do next. Can’t escape Adam Smith’s “revenge” for indulging in bad economic policy for political gains. However, the time-tested “Sahm rule” is sending a reassuring signal: economy may be slowing but no recession in sight. This rule simply states that if the average of unemployment rate over three-month rises 0.5 percentage-point or more above its low over the previous year, the economy is in recession.

Or, when the combined GDP of nations with negative growth reaches 50% or more of total global GDP, this could signal a global recession. The United States is not there yet. Still, its manufacturing and the broader economy have certainly slowed. Consumer spending remains strong, but there are signs it too, may be flagging. Overall, the uncertainty about global value chains and how these might restructure is having a big dampening effect.

Europe: The eurozone faces a daunting combination of weaker demand for its exports (especially from China), the prospect of a messy Brexit divorce, and internal political problems. Added are growing concerns about the health of the global economy & trade disputes. Its key headwind is deceleration in China, a threat underlined by latest data showing continuing falls in factory output in Germany, Europe’s exporting powerhouse. EU’S growth is being constantly downgraded, reflecting initially disruptions caused by “yellow vests” protests in France & investors’ worry over Italy’s ballooning debt. EU is already growing more slowly than forecast by IMF, with Italy already in recession and Germany, teetering on the brink. Germany narrowly skirted recession in 3Q’19 (GDP up 0.1%, following a fall of 0.2% in 2Q’19) reflecting modest turnaround in consumption, construction & exports. Given the weak German economy (still suffering from deep stress in its auto sector), EU as a whole will likely stagnate, with little prospect of significant recovery in 2020. Indeed, the balance of risks at this time moves to the downside – a further downgrade of growth is possible.

Japan: Its GDP stagnated in 2019 as the Us-china trade dispute and friction with South Korea weighed on exports. The situation is not getting better quickly: the rise in sales tax on October 1 is expected to dampen consumer spending; weakness in China is curbing demand for Japanese exports; the dispute with South Korea is crimping tourism; while the powerful typhoon in October will dampen consumption further in 4Q’19 (-2.1%) and beyond. The economy grew at the slowest pace in the year. Demand will continue to slacken in 2020 amid a rapidly ageing & shrinking population, with inflation still below the central bank’s target.

China and India: Emerging Asia remains the main engine of the global economy – GDP rising 5.9% in 2019 (+6.4% in 2018), spear-headed by China and India (+6.1% each in 2019), and ASEAN5 – Indonesia, Malaysia, Philippines, Thailand & Vietnam (+4.8% in 2019). China & India face their weakest growth outlook but given that they are still expanding rather quickly (3x as fast as AES) and they now make up a combined 27% of global GDP, their contribution to world growth remains sizeable & significant. China is showing fresh signs of weakness. Growth slowed further in October, with disappointing numbers in industrial output, consumption and fixed investment. Further weakness lurks ahead. Growth in India in 2Q’19 fell to a six-year low of 5%; estimates point to GDP slipping in 3Q’19 to 4.2%. Policy stimulus is expected to continue in both nations in the face of external shocks and uncertainties. Growth in China will stabilise, while India’s GDP will rise further to 7% in 2020.

EMES: Growth among EMES will stabilise at 4.5%–5% over the medium term. But with important differences across the region. Emerging Asia remains the powerhouse – with GDP rising 6% a year, despite the gradual slowdown in China, made-up by rising growth in India (+7%), based on continuing structural reforms. Next comes Asean 5 – the dependable area that consistently expands in the region of 5% a year. In contrast, Latin America continues to disappoint – projected to rise 1.8% in 2020, but remains at less than 3% per annum over the medium-term because of structural rigidities, political disruption, and fiscal imbalances (especially in Mexico, Brazil and Argentina) weighing on the outlook. Much depends on recoveries in highly stressed economies (Turkey, Argentina and Iran) and improvements in global weak spots (Mexico, Brazil and Russia). Prospects in Africa vary across the continent, but its big 4 (Nigeria, Ghana, Kenya and South Africa) as a whole will expand GDP by about 4% this year and the next. For EMES as a group, 40 of them will grow in per capita terms by about 3.3%, i.e. 2%age points higher than the average for AES. Real challenge is to ensure growth does materialise & benefits are shared widely.

The group encompasses over 25% of the world’s land mass, 50% of its population and about 25% of global GDP. But, their heterogenicity shows up sharp differences in their performance, reflecting diverse interests and challenges. The robust growth of China and India contrasts with the disappointing results in Brazil, Russia and South Africa. Still, World Bank concluded that BRICS had helped to reduce global income inequalities. As I see it, growth will moderate into 2020 & beyond for China and India, which together with the big 3 AES account for about 50% of global GDP. Brazil, Russia and South Africa will grow much less: by 1% or less in 2019, significantly below their historical averages. Growth resumed in 2Q19 in Brazil after the mining disaster; while expansion in South Africa recovered modestly in 2Q19. Russian growth has since remained weak but expected to recover in 2020. Structural reforms are needed in Russia to boost potential growth. Similarly, reforms in Brazil & South Africa are long overdue to regain investors’ trust and to foster job creation & raise labour flexibility.

To be sure, BRICS has shared concerns to uphold multilateralism, build an open world economy, and safeguard the legitimate development interests of EMES, including unfair competition practices (unilateral sanctions, trade wars, and flagrant abuse of US dollar as a reserve and settlement currency). As I see it, BRICS will also need to move decisively to co-operate in new areas in digital technology and to accelerate scientific innovation, while deepening co-operation in the energy, fintech and environmental protection to combat climate change.

What then are we to do

Global growth in 2019 is set to fall to its slowest rate since the financial crisis. IMF had warned that the self-inflicted wounds of the Us-china trade war had created a precarious economic situation. Titfor-tat tariffs have chilled business confidence and investment, leaving global trade almost stagnant & forcing central banks to cut interest rates to shore-up growth. Crucially, risks are all on the downside.

The trade conflicts could get worse. If so, integrated supply chains, not least in high-tech products, could be badly disrupted. Brexit may still be chaotic. Geopolitical risks also abound, especially in the Middle East and also, in Asia. Above all, relations between the US and China appear not to really improve. Significant financial fragilities exist too, notably the high debt of non-financial corporates. The threat of cyber attacks remains, as does mega-terrorism. Further, governments persist in failing to effectively tackle climate change.

Depressingly, much of what threatens the world economy is self-inflicted and uncalled for; Trump’s trade policy is wrecking the underpinnings of post-war trading system, thereby creating huge uncertainty; Brexit will likely destroy a fruitful partnership. The burgeoning friction between Japan and South Korea too weakens the region. No doubt, governments are collectively playing with fire.

Harvard Prof Summers observes the danger is not so much the global slowdown, as the difficulty of doing much in response. These are fragile times. Structurally deficient aggregate demand remains pervasive. Some of it reflects the wave of populist nationalism that is now sweeping across AES. But some of it also reflects sterile orthodoxy. A modest slowdown is one thing. But it’s another thing when those in charge refuse to seriously deal with a potential sharp downturn.

Prof Tan Sri Lin See-yan of Sunway University is the author of Turbulence in Trying Times (Pearson, 2017) & Trying Troubled Times Amid Trauma & Tumult, 2017–2019 (Pearson, 2019). The views expressed are the writer’s own.