Over the course of 2019 there was a lot of talk about the possibility a global recession. While growth has slowed, however, a downturn has not arrived, and sentiment seems to have improved.
Certainly many risks to global growth still remain – most notably trade tensions and major central banks running out of options for further stimulus – but there now appears to be a growing sense that we probably won’t see a recession next year either.
“Growth should edge higher in 2020, limiting recession risks,” global asset manager BlackRock argued in a recent note.
This sentiment is shared by Keith Wade, chief economist and strategist at Schroders.
“After a spell of weaker growth, the world economy looks set to pick up in 2020, extending one of the longest ever periods of expansion,” he wrote in a research note. “The slowdown this year has led to concerns that the US economy might contract. In fact, we see activity gaining support from an easing in US-China trade tensions and lower US interest rates. We have upgraded our 2020 global growth forecast, from 2.4% to 2.6%.”
Wade expects a ‘phase one’ trade deal to be finalised between the US and China, which would see these countries halting any further tariffs on each other’s exports.
“This would prompt global trade and business investment to strengthen,” Wade suggested. “Activity could then improve in Europe and Japan, as well as the US.”
Risk to the downside
This growth will create a favourable environment for risk assets, like stocks, BlackRock noted. However, investors should still be cautious.
“The dovish central bank pivot that drove markets in 2019 is largely behind us,” BlackRock pointed out. “Inflation risks look under-appreciated, and the lull in U.S.-China trade tensions could unwind. This leaves us with a modestly pro-risk stance for 2020.”
In an update to clients, Futuregrowth Asset Management also held the view that ‘a broad-based collapse in growth’ is not the most likely scenario. However, it can’t be ruled out.
“The risk to our base case is skewed to the downside,” Futuregrowth said.
“The two notable potential catalysts to this downside risk are sustained weak Euro area growth and continued global trade friction.”
BlackRock also warned that there are ‘powerful structural trends’ that cannot be ignored and will continue to test the resilience of the global markets in coming years.
“Rising inequality and a surge in populism have implications for taxes and regulation,” it noted. “Trade frictions and deglobalisation are weighing on growth and boosting inflation. Interest rates are nearing lower bounds and crimping the effectiveness of monetary policy. And sustainability-related factors such as climate change are having real-world consequences, affecting asset prices as investors start to pay attention.”
These issues make the longer term outlook far less certain.
Where does that leave SA?
Global uncertainty will also make things more difficult for South Africa, which is urgently in need of higher growth. A global recession would only compound the country’s challenges.
Whatever happens around the world, however, South Africa has to address the specific issues that are holding its economy back.
“Locally, the biggest impediment to higher local growth remains of a structural nature,” Futuregrowth noted.
“The low-growth trap is largely due to policy uncertainty, weak policy implementation, low levels of fixed capital investment and a rigid labour market.”
While noting that there has been some progress towards improving governance, Futuregrowth argued that restoring state-owned enterprises (SOEs) remains critical.
“The perilous state of a number of SOEs remains a negative risk to the fiscus, and therefore to domestic economic growth,” it said. “This includes the negative impact of the acute operational challenges at Eskom.”