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2020 Global Macro Outlook: Calmer Waters Ahead

Trade disputes disrupted global economic growth in 2019, but with tensions and monetary policy simultaneously easing, the global economy could be on a path to recovery.

A year ago, the global economy seemed poised for smooth sailing. However, as 2019 progressed, trade tensions dropped an anchor on progress, dragging down corporate confidence and capital spending, and ultimately slowed progress by nearly 60 basis points.

For 2020, the synchronous easing of trade tensions and monetary policy will be a key theme. Though uncertainties over trade still linger, the current sentiment is positive.

Heading into 2020, however, the winds could shift, setting up the global economy for a third “mini-cycle recovery” in this decade-long expansion.

“While this global cycle has lasted more than a decade, constant interruptions have thus far averted an exuberant stage that would threaten overheating,” says Chetan Ahya, Morgan Stanley's Chief Economist. Those disruptions included the European debt crisis in 2011, China's slowdown in 2014 and, most recently, trade tensions. “Now, with trade tensions and monetary policy easing concurrently, we think the macroeconomy can continue to make forward progress.”

Looking to the Future

In Morgan Stanley's 2020 Global Macro Outlook, Ahya and his colleagues forecast a recovery in global GDP growth from 2.9% in 4Q19 to 3.4% in 4Q20 (averaging 3.2% GDP growth in 2020). They also forecast 3.5% growth in 2021, up from an estimated 3% in 2019. This growth will come predominantly from emerging markets and, to a lesser degree, an improving outlook in Europe. The U.S. economy continues to sit on stable ground, but its pace of growth may slow down.

However, there is an asterisk with this outlook: “Should additional tariffs be enacted, we think global growth could decelerate further,” Ahya says. Moreover, with rates already low, central bankers around the world will be more limited than before to respond to any global shocks.

For this reason, Morgan Stanley strategists are prescribing more nimble and defensive positioning than in a typical recovery.

Morgan Stanley Real GDP Growth Forecasts

2019E 2020E 2021E
GLOBAL 3.0 3.2 3.5
G10 1.7 1.3 1.5
U.S. 2.3 1.8 1.9
Euro Area 1.2 0.9 1.2
Japan 0.9 0.0. 0.7
UK 1.2 1.4 2.0
Emerging Markets 3.9 4.4 4.7
China 6.1 6.0 5.9
India 5.0 6.3 6.8
Brazil 0.8 2.2 3.1
Russia 1.2 1.7 2.0
Source: Haver Analytics, IMF, Morgan Stanley Research forecasts; Note: Aggregates are PPP-weighted.

Synchronous Easing

For 2020, Ahya says that the synchronous easing of trade tensions and monetary policy will be a key theme. Though U.S.-China trade will remain a factor in 2020, the current sentiment is positive.

Meanwhile, 20 central banks have eased monetary policy over the past 12 months and Morgan Stanley economists expect more easing, with the global weighted average policy rate reaching a seven-year low by March 2020.

“Throughout 2018, tighter policy and escalating trade tensions both weighed on growth, and even though monetary policy began to ease from first quarter 2019, it was offset by rising trade tensions,” Ahya says. “Today, these two forces are reinforcing each other in supporting the global economy.”

Beyond this convergence, consumption improvements could also propel a mini-recovery. “Today the consumer in aggregate is in relatively good shape, with healthy household balance sheets, low unemployment in developed markets and moderate wage growth,” Ahya says. Among other positives, the corporate sector has responded to tariff threats by trimming hours rather than laying off employees, avoiding a “spillover effect” from tariffs thus far.

Another Mini-Cycle Recovery in the Context of a Late-Cycle Expansion

Source: Haver Analytics, CEIC, national sources, IMF, Morgan Stanley forecasts; Note: Global GDP includes economies under Morgan Stanley coverage and the real GDP growth is the PPP-based GDP-weighted average.

Stable But Slowing U.S. Growth

Although economists forecast an average year for the U.S. consumer, a strong job market coupled with low interest rates keeps the U.S. economy on solid footing. The pace of U.S. growth is slowing, but this comes after years of above-average expansion.

“Judging from the current unemployment gap, we'd characterize the U.S. as distinctly in the late-cycle phase of recovery,” says Chief U.S. Economist Ellen Zentner. On the positive side, stabilizing growth elsewhere in the world should lift exports and business investment, which are currently at very low levels. Putting this together, Morgan Stanley's base-case outlook calls for U.S. GDP growth of 1.8% in 2020, versus an estimated 2.3% in 2019 on a 4Q/4Q basis.

Capex Recovery in 2020 Will Likely Be Modest

Source: Haver Analytics, CEIC, Morgan Stanley Research forecasts; Note: Global ex U.S. real investment includes euro areas, Japan, UK, China, India, Russia, Brazil, Korea, Indonesia, Taiwan and Mexico. The euro area investment is gross fixed capital formation excluding intellectual property products and cultivated biological assets.

Steady Progress for Emerging Markets

Less uncertainty around trade tensions is particularly key for emerging markets. In China, the combination of reduced tariff uncertainty and stable policy support could lead to improved corporate confidence and a steady expansion of the consumer class, adding up to a more optimistic outlook. “We expect growth to bottom in the fourth quarter of 2019 and recover modestly from there,” says Chief China Economist Robin Xing, whose team is forecasting GDP growth of 6% for China in 2020. This is also good news for Korea, which has been affected by U.S.-China trade tensions.

In India, past policy measures could create a virtuous cycle of growth. Economists expect GDP growth to reach 6.3% in 2020 and 6.8% in 2021, up from an estimated 5% this year.

There are other bright spots. Notably, the Brazilian economy is poised to accelerate in 2020 as historically low interest rates spur consumption and in turn investment activity. Morgan Stanley raised its GDP growth estimate for Brazil to 2.2% for the year ahead and 3.1% for 2021.

Bluer Sky in Europe

Growth in Europe continues to be sluggish, but economists see flickers of life as less uncertainty about trade, policy and Brexit unleash pent-up demand. Although real GDP growth in the Euro area is likely to dip below 1% in 2020, economists expect it to pick up again by 2021.

The U.K. may follow a similar trajectory, assuming an orderly resolution of Brexit. Uncertainty over the U.K.'s exit from the European Union has played no small role in dampening growth. With a resolution on the horizon, the economy could soon accelerate above trend. Economists are calling for a 1.4% bump in GDP growth for 2020 followed by 2% in 2021.

For more Morgan Stanley Research on Global Strategy, ask your Morgan Stanley representative or Financial Advisor for the full report, “2020 Global Macro Outlook: Late-Cycle Expansion Extends” (Nov. 17, 2019). Plus, more Ideas from Morgan Stanley's thought leaders.