Stars are aligning. Expect a gradual economic revival in 2020

Representative Image

Optimistic signs of a global economic recovery in 2020 are getting visible as 2019, which saw a synchronised growth slowdown across the world, draws to a close.

Positive developments in US-China trade negotiations with an agreement on a limited Phase-1 deal and better prospects of an orderly Brexit have reduced policy uncertainty affecting global economic activity, especially in the manufacturing sector.

The recent spate of data from major global economies have added to the signs of growing resilience. In the US, a robust consumer sector helped by unemployment levels persisting at a 50-year low, monetary easing by the US Fed and early signs of stabilisation in manufacturing have eased the fears of an impending recession.

In the Eurozone, a sharp recovery in business sentiment in November augurs well for the coming year. Recent readings of the PMI (Purchasing Managers' Index) data from the region are also indicating stabilisation in activity after a period of prolonged slump, especially in Germany -- the region’s largest economy.

In China, new loans picked up in November over the previous month, helped by an easier monetary policy and financial conditions. Iron ore and other construction material prices have risen recently on the optimistic view of domestic construction demand in China next year. Global financial markets have also seen a surge in optimism since October on the back of these positive developments and anticipating a recovery.

Despite these indications of a turnaround taking shape, underlying growth drivers remain weak and the pace of any pick-up in economic activity over the coming year may be slow. Manufacturing activity remains weak, trade volumes are relatively low and investment activity is sluggish. In China, for instance, the pace of fixed asset investment has slowed to its lowest level in two decades. That, in turn, is leading to a contraction in its import demand from other economies dependent on Chinese commodities.

In Germany, the manufacturing sector is in the midst of a recession, with industrial production contracting by 5.3 percent in October, extending its biggest downturn since 2009.

Critically, the prospects of a meaningful and sustainable recovery in 2020 hinge on the US and China reaching a sustainable truce in their 20-month trade war, which in the first instance takes tariffs back to May 2019 levels. Trade policy uncertainty has adversely affected manufacturing and investment activity, along with business sentiment globally. Therefore, any alleviation of this risk would very helpful in providing a sentiment boost.

China, which contributes almost one-third of global growth, however, may continue to focus on maintaining growth around 6 percent – the slowest pace in 30 years. That is a level consistent with what Chinese policymakers believe is the potential growth rate amid their efforts to de-leverage the non-financial corporate sector, curb unregulated lending by shadow banks and rebalance the economy towards domestic consumption.

Despite real GDP (gross domestic product) growth falling in 2019, Chinese authorities have shown restraint in reflating the economy through a large monetary and fiscal stimulus package in order to avoid further debt build-up. A record onshore corporate bond defaults in 2019 amid a growth slowdown and falling industrial profits poses a risk for the Chinese financial system from increasing credit risk. Thus, the current moderate approach to monetary stimulus may continue in 2020, too. And, rising CPI (Consumer Price Index) inflation could drag consumer spending.

In the US, while consumer spending remains strong, business sentiment, investment activity and exports remain lacklustre. The Federal Reserve has signalled that it would keep rates unchanged in 2020 and expects growth at 2 percent in 2020. Any fiscal stimulus looks difficult ahead of presidential elections in November.

In the Eurozone, despite years of negative policy rates by the ECB (European Central Bank) and more than 2.6 trillion euro of bond purchases, economic growth remains muted and is likely to remain that way. The ECB has lowered its growth forecast to 1.1 percent for 2020 from 1.2 percent earlier.

As for India, recovery efforts will have to focus on fiscal measures to support consumption and investment and policy steps to address lenders’ risk aversion and improve supply of credit as the monetary policy has limited room for further easing. In the meantime, the recently announced RBI operation of buying longer maturity bonds and selling those with shorter maturity simultaneously would help reduce the term premium gradually and bring down long-term rates.

Overall, 2020 is certainly beginning with a more encouraging backdrop and loose financial conditions. The strength of a recovery depends on key global risks, both economic and geo-political, remaining contained, investment activity picking up and financial markets conditions remaining largely orderly. The magnitude is likely to be muted over an estimated 3 percent global growth in 2019 as the US and China have larger contentious issues to resolve, which could stall the progress on trade.

Gaurav Kapur is the chief economist of IndusInd Bank. Views are personal.