Animal spirts present upside risks
The story behind our global forecasts over the next two years is simple. Widespread monetary policy easing during 2019, coupled with some fading of geopolitical risks and the completion of an inventory cycle, allow growth to first stabilise and then gradually rise as the year progresses. Initially, most of the boost comes from emerging markets, particularly those where growth slumped the most. An improvement in the advanced economies follows with a lag. However, even with that better performance, growth is expected to be subdued as monetary policy efficacy remains low, a major fiscal impulse is unlikely and geopolitical risks are still elevated.
It is a truism that our point forecasts are more likely to be wrong than right. But what are the main alternative scenarios to our tepid outlook? In the next six months, it is that the data come in stronger than we have factored in. For example, we are forecasting growth to slow further in the US and China this year – the key drivers of the global economy - but the data flow has shown a great deal of resilience of late, with some cyclical indicators improving (see Chart 1). This may imply either a greater responsiveness to the stimulus already delivered, a larger impact from the trade truce between the two economies, or both. Indeed, with animal spirits rising, particularly in financial markets, there is a plausible scenario in which pent-up demand, particularly for capital goods, is unlocked, driving a meaningful cyclical upswing across the globe.
If we look further out, however, risks still appear tilted to the downside. Not only is the cycle old, but monetary policy space is low. With global debt levels elevated, and markets pricing out recession risks, vulnerability to shocks is high. If for example the US-China trade truce unravelled, as it has before, because China can’t deliver on its optimistic commitments, market and business sentiment would sour quickly, dragging the global economy and markets down with it.
Chart 1: Stabilising signs in the US and ChinaSource: Haver, ASIRI (as of December 2019)