The outlook for global growth stabilises

The first indicators of the year give reason for cautious optimism. After months of decline, the global economic indicators stabilised in the last quarter of 2019. This was reflected in the global composite Purchasing Managers’ Index (PMI), which improved in the final two months of last year (reaching 51.7 points in December), although it still remains rather contained. Furthermore, the GDP growth data for Q4 already available (such as those of the US, China, the euro area and Mexico) indicate that global economic growth stood at around 2.9% year-on-year in the final quarter of last year, equalling the figure for Q3. The slowdown in global growth in 2019 (it is estimated that global GDP will have grown by 2.9% in 2019, compared to 3.6% in 2018) was the result of a combination of factors: the weakening of global trade after the trade tensions between the US and China, uncertainty surrounding Brexit and the widespread cooling of the manufacturing sector, as well as specific difficulties experienced in certain emerging countries such as India, Brazil and Russia. For 2020, a recovery of growth in these countries is expected, which will drive the improvement in global economic activity (bringing it to 3.2% according to CaixaBank Research’s forecasts).

The balance of risks in 2020 is less negative, but remains significant. In particular, both the cooling of the trade tensions between the US and China (who signed a minimal trade agreement in January) and the formalisation of Brexit on 31 January should result in a reduction in the uncertainty that has restricted investment and international trade. In addition, the major economies will continue to enjoy the support of monetary policy, which took a dovish turn in 2019. Even so, there remain significant risks. These include the possibility of a renewed escalation of tensions between the US and China, which cannot be ruled out, the worsening of geopolitical friction relating to Iran, risks related to the high stock market valuations in various segments of the financial markets and the vulnerabilities of several emerging economies.

US

The US economy grew by a solid 2.3% in 2019. While lower than the figure for 2018 (2.9%, with an economy heavily supported by the fiscal stimulus approved at the end of 2017), this figure also stood above the country’s potential (which we estimate at around 1.9%). Such a growth rate is significant, in spite of the country’s protectionist measures and trade tensions with China. In Q4 2019, growth stood at 0.5% in quarter-on-quarter terms, and 2.3% year-on-year, supported by private consumption, public consumption and residential investment. In contrast, business investment contracted once again in quarter-on-quarter terms. Moreover, despite the fact that improving this component was the explicit goal of the 2017 tax reform, its contribution to growth during the last two years has been moderate and below the expectations of most analysts. Public and private consumption, meanwhile, have continued to make significant contributions to growth (see the Focus «Good outlook for the US economy, with the permission of investment» in the MR12/2019). Looking ahead into 2020, we expect growth to experience a gentle slowdown to levels more in line with potential growth, although the economy will continue to count on the support of a favourable monetary policy (after the Fed’s three rate cuts in 2019) and will maintain solid growth rates. This view is supported by the initial data available for the first quarter, such as the consumer confidence index developed by the Conference Board, which rose to 131.6 in January (its highest level in the past 5 months).

EUROPE

Brexit is official as of 31 January following the ratification of the agreement in the House of Commons and its approval in the European Parliament. The United Kingdom and the EU have now begun an 11-month transition period with a countdown to reach an agreement on the new relationship, during which time the UK will continue to be part of the single market and the customs union. As explained in the Focus «The new unknowns of Brexit in 2020» in this same Monthly Report, the number of topics on which the EU and the United Kingdom will have to reach an agreement (relating to trade, finance, customs, fishing and the movement of people, etc.) is very high, and time is short. For this reason, while the uncertainty related to Brexit has reduced, it will not disappear, and it could continue to affect both the UK economy and that of European countries.

2019, a challenging year for the euro area. The euro area economy has disappointed analysts, who were expecting a recovery at the end of the year, with GDP growth of 0.1% quarter-on-quarter in Q4 2019 (1.0% year-on-year). This first estimate implies annual growth for 2019 as a whole at 1.2%, significantly below the 1.9% of 2018. Europe is thus confirmed as the main victim of the deterioration of the global environment in 2019, partly due to its high degree of openness to trade and integration into the global economy. In addition, the manufacturing sector has been particularly hard hit by both global uncertainty and a shock to the automotive industry. However, manufacturing firms have begun to show small signs of improvement. In particular, the manufacturing PMI for the euro area improved in January, from 46.3 points in December to 47.8, although it remains below the 50-point threshold (which separates expansive and contractionary territory). In 2020, the euro area economy will continue to be supported by the ECB’s dovish monetary policy, as well as by a moderately expansive fiscal policy. Furthermore, as the reduction in global uncertainties discussed above translates into a gradual recovery in confidence, the economy could display more traction. Among the risks that could jeopardise this recovery, of particular note is the possibility of a rebound in trade tensions with the US, which still has to decide whether to increase tariffs on imports of European cars, as well as the fear of contagion affecting services and domestic demand, which have so far resisted the difficulties experienced in the rest of the economy.

Germany, Europe’s biggest economy and the main focus of various shocks in 2019 ended the year with annual growth of 0.6%. This represents a marked slowdown compared to 2017 and 2018, when the economy grew by 2.8% and 1.6%, respectively. However, the business sentiment data of recent months suggest that the German economy is beginning to recover from a very difficult year. Both the manufacturing PMI and that of services have increased sharply since September, which was the worst month of the year in terms of business sentiment. These figures should alleviate fears of contagion from the recession in the manufacturing sector reaching the services sector. On the other hand, among the GDP data for Q4 that have been published, the figures for France and Italy proved lower than expected. In France, GDP fell 0.1% quarter-on-quarter, hampered by a sharp drop in inventories in a quarter in which consumption continued to grow at a rate of 0.2% despite the strikes of recent months against President Macron’s pension reform. In Italy, GDP fell 0.3% quarter- on-quarter, the sharpest drop since 2013. Although the breakdown by component is not yet available, this decline is also expected to reflect a negative impact from inventories.

EMERGING MARKETS

In China, the economic slowdown continues and remains gradual... with the permission of the coronavirus. GDP grew 6.0% year-on-year in Q4 2019 (6.0% in Q3), bringing the figure for the year as a whole to 6.1%, 5 decimal points less than in 2018. Although this is the lowest figure since 1990, it remains in line with the government’s growth target (between 6.0% and 6.5%) and is consistent with the transition towards a more tertiary-based economy. Furthermore, economic activity data for December showed a more dynamic tone than in October and November. In particular, industrial production rose by 6.9% year-on-year (6.2% in November) and retail sales by 8.0% (8.0% in November). For the coming quarters, these indicators suggest that the Chinese economy should continue to experience a gradual slowdown. Nevertheless, the emergence of the coronavirus in recent weeks, with its epicentre in the Chinese region of Wuhan, has resulted in quarantines of entire cities and the closure of several airports. Its economic cost is uncertain, although the experience from other episodes (such as SARS in 2002-2003, also originating in China) suggests that this type of phenomena has an impact on economic performance that is significant, but at the same time limited in time and geographical scope. Furthermore, such episodes are usually followed by an economic rebound (due to the realisation of the consumption and investment decisions postponed during the health emergency). However, the greater importance of China’s economy and, crucially, its greater integration into global value chains compared to 2003 could result in a larger impact from the coronavirus.

Mexico’s economic activity proved disappointing in 2019. GDP fell by 0.1% in 2019 as a whole, after the figure for Q4 once again proved disappointing (0.0% quarter-on-quarter and –0.3% year-on-year). This figure suggests that the difficulties of recent quarters, accentuated by the poor performance of industry and by global uncertainty, are still very present. In this regard, here at CaixaBank Research we expect to see a very gradual recovery of the Mexican economy, with 1.1% GDP growth forecast in 2020.