In our last daily note for this year, we set out four macro themes that we think will shape markets in 2020. We would like to take this opportunity to thank you for reading and for the feedback. We are well aware that there is a lot of analysis out there, so we value it greatly. Enjoy the holidays and have a happy new year!
No V-shaped recovery – Central bank easing and a mini US-China trade deal seem to have encouraged investor expectations of a V-shaped recovery of global economic growth next year. We think economic growth will remain slower for longer than expected. The first half of next year is likely to be lacklustre, while we expect a relatively modest improvement in the second half. Not all monetary stimulus is equal. China’s easing has been nowhere near as powerful as in the past, with the monetary policy stance remaining rather conservative. The same can be said of the Fed’s rate cuts (that have only taken policy rates to roughly neutral) and the rather modest ECB stimulus package.
In addition, despite the US-China agreement, we think uncertainty for businesses surrounding tariffs will not entirely dissipate. Finally, we expect the weakness in industry – despite signs of bottoming out – to spill over more significantly to domestic economies, with a more notable impact on the service sector and the labour market in the US and eurozone.
Inflation still subdued – We are likely to see some near term upward pressure on headline inflation from rising oil and food prices, but we expect the impact to prove transitory. Underlying inflationary pressures are likely to remain subdued against the background of weak economic growth and very low inflation expectations. We do not expect companies in advanced economies to respond to pressures on margins by raising prices in this environment. Rather, they are likely to try and contain labour costs, which will mean lower employment and wage growth. Structural downward pressures on inflation from digitalisation are likely to persist.
There is no fiscal stimulus – Fiscal stimulus – especially in Europe – makes so much sense, that many commentators talk about it as if it is a done deal. However, a close look at eurozone governments’ budgets and draft budgets for next year are a reality check. According to the European Commission, the total fiscal stimulus in 2020 is planned at 0.2% GDP currently, which is negligible. The past fiscal stimulus in the US is also starting to wane. There might be more hope for fiscal stimulus in the both the US and eurozone in 2021, given various political shifts in Germany and the US (following the Presidential Election), but in the immediate future, major fiscal stimulus does not seem likely.
Further piece-meal easing- With economic growth and inflation likely to disappoint ECB expectations, we expect the central bank to announce a second stimulus package in March, containing the same elements as the September package. With economic growth slowing more than it expects, we also expect an additional 25bp rate cut from the Fed. Finally, the Chinese authorities will likely to continue to take measures to prevent the economy slowing too quickly. However, we think that the scale of stimulus will remain relatively modest compared to past episodes. (Nick Kounis on behalf of the team)