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December 9, 2019

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Global economy to slow, trade tensions to ease in 2020

Global economic growth is expected to fall to just over 3 percent in 2019 and 2020 from 3.8 percent in 2018, while easing US-China trade tensions would lead to a “noisy ceasefire” for the US election year, according to a newly released 2020 market outlook report by Bank of America (BofA) Merrill Lynch Global Research.

The research team projected “a bottoming of economic growth” in the upcoming spring, as trade tensions fade and recession risk remains relatively low. Meanwhile, global inflation will dip to 2.7 percent by 2021, from 3.1 percent this year.

“A trade war ceasefire, a super preemptive Fed and aggressive easing from China together suggest relatively low recession risk in 2020,” Ethan Harris, head of global economics at BofA Merrill Lynch Global Research, told a recent media event.

“The new year and decade begin near the tail end of the longest bull market on record, and despite recent strong gains, investor anxiety remains at a high level,”Candace Browning, head of BofA Merrill Lynch Global Research, said in the report.

“Many of the driving factors — central bank policy, globalization, oil — have peaked, and new economic paradigms are emerging in response to a different set of challenges facing the world’s social, environment, political and economic systems,” she noted.

As the global economy and US-China trade frictions have been approaching “the eye of the storm,” Harris said he expected a noisy ceasefire for the US election year and he remained optimistic over a potential “mini deal,” as the trade tensions seem to be deescalating earlier than expected.

“Right now we’re reaching a point where the Trump administration has a strong incentive to do some kind of deal. There’s an election year coming up. The economy is slowing down,” he elaborated. “The last round of tariffs is mainly on consumer products, which is a politically risky set of tariffs. So we think the incentive to strike a deal is quite high,” Harris added.

“An interim, skinny US-China trade deal should temporarily relieve trade concerns ahead of the US presidential election and pave the way for a midyear, mini-boost in global growth led by US rates and a weaker dollar,” said the report.

Yet Harris voiced concern that trade headwind may well return after the US election.

“We think that the trade war will have a ceasefire for the election year, but then some kind of escalation after the election year.

“That’s important, because if it’s not a conclusive deal, the benefit to the economy is limited. That’s why we expect a very modest pickup in growth,” he said.

Central banks resort to easing

“A lot of companies are still going to be worried about where we are two years from now,” the economist cautioned. “The main effect of the trade war is a freezing up of business investment for any company (with) global connections.”

The lackluster forecast of global growth indicates that the slackness is “broad-based,” as nearly every major economy has performed worse than expected this year and the global manufacturing sector has been heavily hit, mainly due to the trade tensions, according to the BofA Merrill Lynch Global Research report.

Regionally speaking, the institute forecasts the European economy to grow by 1 percent in 2020 despite challenging external conditions, while its core inflation would inch higher to 1.3 percent in the year ahead.

It also pointed out that the outlook for emerging market economies largely depends on the developments of US-China trade scenarios in 2020.

“Total emerging market returns of 7.1 percent in local debt are forecast, but only 2.6 percent for external debt. Latin America is mounting a cyclical recovery, likely led by Brazil and Andean economies, while Argentina’s new government faces extreme economic challenges,” said the report.

The US gross domestic product is estimated to pull back to trend, with growth averaging 1.7 percent over the next two years, and inflation should be muted, with core Personal Consumption Expenditure inflation at around 2 percent by the end of 2020.

Looking ahead to 2020, the US economy is vulnerable to external shocks and uncertainty caused by the trade tensions and the presidential election, but the baseline is for the economic recovery to continue, according to Michelle Meyer, head of US economics at BofA Merrill Lynch Global Research.

This means that the Federal Reserve will likely stay on hold for the foreseeable future. “Given the Fed’s focus on avoiding a recession, the risk of further cutting outweighs hikes,” said Meyer.

The research team also found that the world's central banks responded to weakness in growth and inflation by cutting rates, with 24 of 39 central banks covered in the report easing their policies this year.

“Fed actions freed other central banks to ease, and with the exception of China, many are also expected to put rate actions on hold next year,” said the report.

Despite having more room to cut rates, central banks in emerging market economies are expected to conduct mild easing next year, except those in a few economies where rates are very high, which might be unwilling to cut too much with the Fed back on hold.


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