The end of 2019 varied the forecasts and found international bond and equity markets strong and higher price levels than at the beginning of 2020.
The U.S. stock market index S&P 500 rose > 28,5%.
Germany’s DAX stock market index rose > 26,15%.
Japan’s Nikkei 225 stock market index rose > 19,02%.
China’s SSBC stock market index rose > 20,8%.
by Thanos S. Chonthrogiannis
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The World Economy
The Easing in the trade war between the US and China alongside maintaining the quantitative easing monetary policy of the major central banks of developed economies are creating the backdrop to which the global economy is expected to have better growth rates if China manages to overcome the nCor-V epidemic, which is putting on pressure the demand and consumption on the Chinese economy. In this case we predict that the global economy will move to 2,8% – 3,0% for 2020 and 3,0% – 3,2% in 2021.
The US and China may have moved on to a trade deal drastically reducing international entrepreneurship concerns, but differences remain, and a hard Brexit between the UK and the EU will spark new uncertainties. However, the US-China trade agreement will lead companies to implement more aggressive business plans and more aggressive business policies such as hiring workers, higher capex etc. and since the duties imposed will be relaxed.
These business policies will be further facilitated by the implementation either of a quantitative easing monetary policy or through the implementation of a new fiscal expansion policies in the future.
For the First Quarter (Q1) and the Second Quarter (Q2) of 2020 respectively, consumption levels are expected to be at the same levels as those seen at the end of 2019 due to the ever-increasing pressure on demand and consumption in China but also to a lesser extent to the demand and consumption of the rest of the planet.
This will result in the growth rates of the global economy to remain stagnant. From the end of the Q2 2020, consumption growth will give the green light to businesses for more expansive policies by boosting demand and ultimately the usage-utilization indicators of business working capital.
The trend in terms of continued improvement in pay observed in previous six-month at US market is expected to be continued during 2020. The immediate result of this will be to boost consumption and increase the productivity of enterprises with little but significant improvement in unemployment indicators.
Global growth is expected to increase its pace after the end of Q2 2020 to reach an increased rate at the end of the year compared to its end-of-2019 levels.
We expect global growth to increase its pace after the Q2 of 2020, and as inflation will remain low in developed economies, while it is highly controlled in emerging economies.
The combination of an increased quantitative easing in monetary policy which is already existed in the EU and Japan will be combined with a quantitative easing monetary policy in the US with aim to increase the chances of winning the November US Presidential election in favour of the current President Donald Trump.
The surprise that will accelerate the global economy will come from a combination of fiscal policy implementation by Germany due to the recession-anemic growth situation that German economy will experienced at the end of the Second Quarter of 2020 and from the implementation of possible fiscal expansive policies in the US before the November US Presidential elections.
Central Bank monetary policy (FED, ECB, BOJ) in developed markets is expected to remain on standby without intent to tighten further in 2020.
Developing economies are expected to move at a growth rate of between 3,8% – 4,4% on annual base for 2020. Developed economies will not experience such growth rates and as it will take time to repair the damage to international trade which took place up to date.
For the EU we again expect anemic growth to move close to 1% of GDP for 2020 and 1,2% of GDP for 2021.
In the US we expect stronger growth to move close to 2% of GDP for 2020 and close to 2,4% of GDP for 2021.
Emerging Markets
China
Due to the existence of the nCor-V epidemic and the effects of the trade war between the US and China, the Chinese economy is expected to receive a further hit on its previously high levels of growth. This will have as result the Chinese economy to slow further and its growth to move to an annual level of 4% of GDP for 2020.
The treatment for the nCor-V virus will be delayed appearing in the spotlight, resulting in the exclusion of much of the country’s provinces remaining at least until the end of the Q2 of 2020. This will have as a direct outcome the drastic contraction and consumption in the Chinese economy.
The production of large industries of both multinational and domestic industries based in China will be at an end for at least the Q1 and Q2 respectively of 2020. The Central Bank of China will be forced to loosen its monetary policy further so that heavily indebted companies on the brink of bankruptcy, due to the results of the nCor-V events in the domestic demand and consumption, to be able to refinance their loan obligations with low interest rates loans.
India
The structural policies which are expected to be implemented by the Government of India with aim to assist investment in the country in conjunction with the accelerated improvement of the climate in the financial sector and the further effort to integrate the shadow economy and the shadow financial system in the real economy will create the positive conditions for GDP growth rates which will expected to reach the levels of 5,7% for 2020 and 6,1% for 2021.
Russia
The Russian government will be forced to implement fiscal expansive policies implementing expanded subsidization-benefits social policy across the country in order to reduce the unemployment figures and the extreme poverty in the country during 2020.
Brazil
The existing low interest rates favour consumption and investment growth with the country’s growth rate moving between 1,9% – 2,1% of GDP for 2020 and 3% of GDP for 2021.
Argentina
Unlike Brazil, the country’s economy will continue to be in recession, while increasing public spending will be directed for social benefits – rather than implementing policies to drastically reduce the amount of public spending in the federal budget with a view to applying equivalent fiscal value measures to the economy that will further reduce indirect and direct taxation – keep taxation and inflation at high levels by constantly discouraging the realization of foreign and domestic investments in the country that would reduce next the levels of unemployment and poverty respectively.
The development of the economies of developed markets will be based on sectors-industries of the economy such as circular goods, products for industry, processors, cars and real estate.
Monetary Policy
The easing in monetary policy will continue in 2020 globally. More expanded monetary policy will occur in the EU, Japan and China respectively and less in the US.
2020 will be a year when the evolution in macroeconomic data will determine the trend in an environment that does not include surprises for drastically loose monetary policies. The immediate result of this is that growth indicators mainly in developed economies will be sluggish.
Due to the trade wars and the created uncertainty in the global business world, loose monetary policy has not given the expected boost to the real economy.
If there is a real “ceasefire” in trade disputes, from the Second Half of 2020 onwards we expect a short-lived positive cycle of growth in the world economy.
In emerging economies, inflation is expected to be maintained at controlled levels close to central bank targets.
In the US, due to the fact that 2020 is the year of the Presidential elections, expanding fiscal policies are expected to be implemented and further easing of the FED’s monetary policy creating a further increase in the growth rate of the US economy that will favor incumbent US President Donald Trump’s election campaign.
The EU will continue to lose monetary policy (more quantitative easing) without, however, accompanied by corresponding fiscal policies of an expansive nature (Germany will not implement expansive fiscal policies to cause an increase in its domestic demand), although that these expansive fiscal policies would favour EU export economies.
The pleasing finding lies in the fact that both fiscal and monetary policy are on parallel roads and not at odds between them. This is demonstrated by the fact that adjusted primary deficits in both the four major economies of the world (US, EU, Japan, UK) and the strong BRICS economies reached 3,3% in 2019 compared with 2,6% in 2018 and are expected to further expand them for 2020.
U.S.
The macroeconomic environment in the US will continue to be characterised by low levels of unemployment and inflation respectively. Growth will remain low of around 2%, while pay rises are expected to put further pressure on companies’ profit margins by limiting both their performance and profit margins.
The pay increases will further boost the consumer spending of the US economy. At the same time, we do not expect pay rises to exceed the current inflation which is expected for 2020 to reach 2% on annual base.
Due to the uncertainty and reticence of the global business community, which basically stem from the non-definitive agreement to end the US-China trade war, we expect a reduction in the rate of growth of inventories with direct consequence the limitation of the US GDP expansion.
The low interest rate regime means that both households and businesses will continue to finance their consumption seamlessly without any restriction. The real estate market operates in normal contexts without exaggerating property market prices indicating the creation of a bubble that would lead to a sharp recession.
US unemployment levels for 2020 will move close to 3,4% – 3,5% while pay growth will be reduced to 3% and as businesses try to improve their margin levels.
The Federal Budget deficit for the first time will exceed $1trillion creating suffocating questions for politicians and political parties as well as policy makers and investors in general about how it will be funded.
Further questions that will be put on the table of candidates for the Presidential elections and on which convincing answers should be given are the tax regime and protectionism and the chances of a continuation of a new round of trade disputes.
Japan
The only change we expect in Japan’s fiscal policy can only come from the application of the change in Article 9 of the Constitution in Japan, which determines both the size and maintenance costs of the Japanese armed forces, by releasing them from any imposed restrictions that have existed to date, having an exclusive defence mission and related solely to the defence of the country, will also change the data that has been in force for Japan.
Such a change will signal to the World Community that it is time for Japan to reflect its economic strength in the military sector to date. In this case, Japan’s defence industry will be able to develop drastically due to public spending increasingly absorbing technological development and the equipment of the new Japanese Armed Forces causing rapid growth of its GDP to be combined with increased exports of Japanese weapons systems.
Only in this way will Japan be able to escape the “quicksand” of very low-zero interest rates to spark growth in the country.
What should worry Japan’s political world is the fact that raw materials are hard to find out about domestic production, forcing Japan to depend, mainly energetically, on imports of these raw materials from third countries.
Ensuring the guarantees for the smooth flow of essential raw materials into the Japanese economy, especially from its allies, and not only, should be the issue that will concern the Japanese in detail before moving on to the change in Article 9.
The risk to investment
In the investment environment characterised by the yield-risk relationship, investors should count:
- The limited potential of the Central Banks of the major economies to move more loosely (to implement a further quantitative easing policy) in an already relaxed environment in terms of monetary policy.
- In emerging economies, it should be borne in mind that the main risk is the ever-increasing inflation which in turn will create an embankment in growth rates, in turn causing a strong slowdown in growth rates which under certain conditions to reach zero growth levels.
- The non-definitive cessation of trade disputes and the enlargement of countries including US-EU, EU-UK, US-China, etc. which will give a negative sign to investment expectations by creating a reduction in what so far expected growth rates in the respective economies.
- A worrying phenomenon that investors should take seriously is the very high level of business lending in the US.
- Another danger is the potential political polarization and uncertainty due to the November Presidential election in the US creating a negative climate at the end of Q3 2020 and by the end of the year.
- For developed economies, the demographic slowdown, the high levels of borrowing and the low levels of inflation are also the most likely to be the main risk of the investment environment in the developed economies.
