The world economy in 2020: better than in 2019, but worse than it has been planned. IMF projections.
The IMF revised down its forecasts for global economic growth. In the World Economic Outlook (WEO) report released in January, projections for 2020 based on 2019 estimates are somewhat less optimistic than those contained in the previous edition of the report in October last year.
Global economic growth is expected to rise from 2.9% last year to 3.3% this year and 3.4% in 2021. The growth rate is positive, but in comparison with the October forecast, their value is reduced by 0.1 percentage point for 2019 and 2020 and by 0.2 percentage points for 2021.
The downward revision of estimates is mainly due to unexpected negative changes in economic activity in several emerging market economies, most notably in India, which led to a reassessment of growth prospects for the next two years.
In some cases, this reassessment also reflects the effects of rising social tensions in several countries and weather-related disasters, from hurricanes in the Caribbean to drought and wildfires in Australia, floods in East Africa and drought in southern Africa.
Despite the headwinds, by the end of the year there were some indications that global economic growth may be bottoming out. Furthermore, monetary policy liberalization continued in several countries in the second half of 2019. In addition to the significant assistance provided by policy liberalization earlier in 2019, its deferred effects should enhance global economic activity at the beginning of 2020. Without monetary stimulus, the estimate of global economic growth in 2019 and its forecast for 2020 would be 0.5 percentage points lower in each of those years.
Market sentiments have improved thanks to the first indications that manufacturing and global trade activity are above their low point, in a massive shift towards accommodative monetary policy, incoming positive news on US-China trade talks, and in reducing the dangers of "brexit". So far, however, there are few signs of turning points in global macroeconomic data.
The first signs of stabilization may become more robust and eventually lead to a stronger link between the still robust level of consumer spending and increased business spending. Additional growth support could come due to the weakening of specific negative factors in major emerging market economies, combined with the effects of monetary easing.
The report notes that significant risks of not meeting projected growth rates still remain. They are associated with the exacerbation of geopolitical tensions, strengthening of social tensions, and further deterioration of relations between the United States and its trading partners, and deepening of the economic contradictions between other countries.
The materialization of these risks could lead to a rapid deterioration in sentiments and cause global economic growth to fall below the baseline.
Experts underline the importance of multilateral cooperation and a more balanced set of policies at the national level to strengthen economic activity and mitigate downside risks. Improving financial resilience, increasing growth potential and achieving greater inclusiveness remain key challenges.
Recent changes and Implications for the Forecast
High-frequency indicators for the fourth quarter are tentatively suggesting that forward momentum has stabilized at a moderate level, supported by a major shift towards a military monetary policy earlier in the year and fiscal easing in some countries (including China, Korea, and the United States).
The temporary factors slowing the growth of the manufacturing industry in the world - the adaptation of the automotive sector to new emission standards, the decrease in the introduction of new high-tech products to the market and inventory accumulation - seem to be fading.
The deterioration of business sentiment and expectations of purchasing managers in the manufacturing industry has stopped, but in general they remained pessimistic. Significantly, there has been an improvement in the subcomponents of new orders in surveys, especially in emerging market economies.
According to survey results, world trade growth appears to be bottoming out. On the other hand, activity in the service sector weakened somewhat, but remained at the level typical for the recovery; it is still supported by resilient consumer spending, which in turn has helped to keep labor markets busy, unemployment low and wage increases moderate.
Supporting financial conditions
The first signs of stabilization reinforced financial market sentiment, which had already been improved by central bank rate cuts. Market prices appear to take into account the outlook for US monetary policy and the Fed's transition to "hold the course" policy after three rate cuts in the second half of 2019. The intermittent positive news on US-China economic relations and the reduction of risk of «hard brexit» support investors' risk appetite.
Stock prices continued to rise throughout the autumn in major advanced economies; underlying sovereign yields up from their lows in September; portfolio flows to emerging market economies, especially bond funds, strengthened. Currency movements from September to early January reflected an overall improvement in risk sentiment and a reduction in trade tensions, with the US dollar and Japanese yen weak by about 2% and strengthening of the Chinese yuan by about 1½%.
The most significant move among major currencies was the appreciation of the British pound (up 4% since September) due to the ideas about reducing the risk of «hard brexit». Thus, financial conditions in advanced and emerging market economies remain broadly accommodative.
Main considerations regarding the outlook for global economic growth in connection with recent developments include: the implications of weaker-than-expected results in the second half of 2019 in major emerging market economies; emerging signs of stabilization in the manufacturing industry in the fourth quarter, with some weakening of activity in the service sector that remains stable; adaptive financial conditions; uncertain tariff prospects, social unrest and geopolitical tensions.
Global Economic Growth Outlook - Slight uplift in 2020
Global economic growth, which was estimated at 2.9% in 2019, is projected to rise to 3.3% in 2020 and slightly further to 3.4% in 2021. Compared to the October WEO forecast, the 2019 estimate and the 2020 forecast are reduced by 0.1 percentage point for each of those years, while the 2021 forecast is reduced by 0.2 percentage points.
The lion's share of the downward revisions are due to the weakening of the outlook for India.
Source: www.imf.org
The trajectory of global economic growth reflects a sharp decline followed by a closer return to established historical indicators for a group of emerging and developing countries, those with insufficiently high indicators and those in a difficult economic situation (including Brazil, India, Mexico, Russia, and Turkey). The growth profile is also based on the premise of maintaining high performance in relatively resilient emerging market economies, even as growth in advanced economies and China gradually slows down and approaches their potential growth rates.
The effects of significant monetary policy liberalization in advanced and emerging market economies in 2019 are expected to have a further influence on the global economy in 2020. Without this monetary stimulus, the 2019 estimate of global economic growth and its forecast for 2020 would have been 0.5 percentage points lower in each of those years. Global recovery is expected to be accompanied by an improved trade growth (also more subdued than projected in October), driven by stronger domestic demand and investment in particular, and also the fading of some temporary headwinds in the automotive and technology sectors.
Source: www.imf.org
These outcomes are highly dependent on avoiding a further escalation of trade tensions between the US and China (and, more generally, preventing a further deterioration in economic relations between the US and China, including in relation to technology supply chains), averting the threat of «brexit» without reaching the Agreement, as well as from the economic consequences of social unrest and geopolitical tensions.
Growth in advanced economies is projected to stabilize at 1.6% in 2020-2021 (0.1 percentage point below the 2020 forecast in the October WEO, mainly due to the revision of the US forecast, the euro area and the UK in downwards and lower forecasts for other advanced economies in Asia, most notably Hong Kong SAR as a result of the protests).
Source: www.imf.org
● In the US, growth is expected to ease from 2.3% in 2019 to 2% in 2020 and further decline to 1.7% in 2021. The weakening of growth reflects the return of fiscal policy to a neutral stance and the expected reduction in the supportive impact of further liberalization of financial conditions.
● In the Euro Zone, growth is projected to rise from 1.2% in 2019 to 1.3% in 2020 and 1.4% in 2021. The October 2019 WEO forecasts for France and Italy remain unchanged, but forecasts for 2020 are revised downward for Germany, where manufacturing activity remained at recessionary levels at the end of 2019, and for Spain — due to a stronger-than-expected slowdown in domestic demand and exports in 2019.
● In the UK, growth is expected to stabilize at 1.4% in 2020 and rise to 1.5% in 2021. The forecast is based on an orderly withdrawal from the European Union at the end of January, followed by a gradual transition to new economic relations.
● In Japan, growth is projected to decline from 1% in 2019 to 0.7% in 2020. In 2021, as the impact of the fiscal stimulus fades, growth is expected to decline to 0.5% (roughly at the level of potential growth).
For the group of emerging market and developing countries, economic growth is expected to rise to 4.4% in 2020 and 4.6% in 2021.
The growth profile for this group of countries reflects a combination of a projected economic recovery from a deep recession in the case of struggling and underperforming emerging market economies, and an ongoing structural slowdown in China.
● Growth in emerging market economies and developing Europe is expected to rise from 1.8% in 2019 to around 2.5% in 2020-21. This improvement reflects continued strong growth in Central and Eastern Europe, increased activity in Russia and an ongoing recovery in Turkey due to the liberalization of financing conditions.
● Growth in the Middle East region and Central Asia is expected to be 2.8% in 2020, rising to 3.2% in 2021. The downgrade forecast for 2020 mainly reflects a downward revision to Saudi Arabia's outlook due to slower expected output growth following the OPEC+ decision in December to extend the supply cut. The outlook in several countries remains subdued due to rising geopolitical tensions (in Iran), social unrest (including in Iraq and Lebanon), and civil strife (in Libya, Syria, Yemen).
Global Financial Conditions - Maintaining Softness
Global financial conditions still remain soft by historical standards.
Source: www.imf.org
In the past three months, markets have been influenced by two main factors: monetary policy and investor perceptions of trade tensions. Monetary policy remained supportive. For example, the US Federal Reserve cut its policy rate by 25 basis points, the European Central Bank resumed net asset purchases of 20 billion euros per month, the People's Bank of China cut the rate under its medium-term lending facility by 5 basis points, in Turkey the central bank cut its policy rate by 450 basis points, while central banks in Russia and Brazil cut their interest rates by 75 and 100 basis points, respectively.
In terms of trade tensions, the market has been swinging back and forth based on the latest trade-related news, including the recent announcement of a “Phase One” trade agreement between the US and China. In net terms, global equity prices have risen about 8 percent over the past three months, with long-term yields in the Euro Zone, Japan and the US up 15 to 30 basis points from a very low level.
This dynamic has left U.S. financial conditions flat on a net basis. The increase in corporate valuations due to higher prices in the stock markets and reducing interest rate spreads on corporate bonds was generally offset by higher long-term yields. However, financial conditions remain soft.
Financial conditions in the euro area continued to ease as a combination of more high stock prices and reducing interest rate spreads on corporate bonds.
In terms of emerging market economies, financial conditions in China remained broadly unchanged, but corporate valuations rose.
Elsewhere in emerging markets (Brazil, India, Mexico, Poland, Russia and Turkey) there has been continued easing of overall conditions. This was mainly the result of a further decline in interest rates and the cost of external borrowings. Average interest rate spreads on sovereign bonds of this group of countries reduced by almost 25 basis points, and interest rate spreads on corporate bonds narrowed by about the same amount.