Global growth weakened considerably in 2019, falling from 3.2% in 2018 to of 2.6; the main culprits, the trade wars and weakening growth in China. In response, many central banks began to loosen monetary policy. However, as global exporters adjusted to the new world of higher tariffs, the impacts of the trade war on real GDP growth turned out to be smaller than expected. By the end of the year, many of the IHS Markit purchasing managers' indexes (especially in manufacturing) began to stabilize and show small gains. Moreover, while any major progress on the trade war will likely have to wait until after the 2020 US elections, an escalation in hostilities—significant enough to do major damage—also seems unlikely.

What's coming in 2020

1) The US economy will expand 2.1%

Based on estimates about sustainable growth in the labor force and productivity, we assess the trend (or potential) growth in the US economy to be around 2.0%. Real GDP growth was above trend from 2017 to 2019 (averaging 2.5% on a calendar-year basis) thanks to fiscal stimulus. However, with the effects of this stimulus wearing off, growth is returning to trend. Second- and third-quarter growth rates were 2.0% and 2.1%, respectively (at a seasonally adjusted annual rate). The run-up to the 2020 presidential election could provide some policy surprises (both positive and negative), which could affect the outlook.

2) Europe's expansion stabilizes

The slump in eurozone growth in 2019 was alarming, with some large economies, notably Germany and Italy, coming perilously close to recession. Nevertheless, there are some signs that the worst may be over, and we expect eurozone growth to stabilize at around 0.9% in 2020. Meanwhile the results of the UK election suggest that while the worst of the Brexit uncertainty may be over, there is still a hard slog ahead, with growth dropping from 1.3% in 2019 to 0.5% in 2020.

3) Japan's post-tax-hike growth stumble will be cushioned by more stimulus

Japan's real GDP growth rate accelerated from 0.3% in 2018 to an estimated 1.1% in 2019. However, fourth-quarter growth is expected to turn negative as a result of the hike in the sales tax from 8% to 10% at the beginning of October. In response, the Abe government announced a larger-than-expected $120 billion, 15-month fiscal package, which will neutralize much of the negative effects of the sales tax hike. Consequently, after falling to 0.3% in 2020, Japanese real GDP growth is projected to recover to 0.5% in 2021.

4) China's growth rate will fall below 6.0% for the first time since1990

While it is tempting to blame much of the recent slowdown on the US-China trade war, the decade-long deceleration is the result of both structural and cyclical factors: an aging population and a sharp drop-off in productivity growth mean that potential growth in China is lower now than a decade ago. We predict China's growth rate will slide even further, to 5.7% in 2020 and 5.6% in 2021, unless the government puts in place a more aggressive stimulus program.

5) Emerging markets will continue to tread water

While China's growth rate has been a key factor in declining emerging markets GDP, emerging markets also faced two other stiff headwinds: lackluster expansions in the developed world and falling commodity prices. Recoveries in the developed world are predicted to remain fragile in the next few years, while commodity prices are expected to slide, at least in the near term. These, along with the simmering trade war and the continued decline in China's rate of expansion, mean that there is very little scope for growth in the emerging world to rise much—if at all—from current low rates. Additionally, the record debt level in the emerging world is a growing concern.

6) Commodity prices will trend down

The push-pull forces in commodity markets remained in full force during 2019. While the focus since early 2018 has been on slowing demand growth, production growth also slowed across 2019, with market conditions tightening in many industries. This improvement in fundamentals will gradually assert itself in the year ahead. After softening in the first half, prices will stabilize or, for some commodities, push slightly higher in the second half of 2020.

7) Inflation will remain subdued

Most of the recent swings in world inflation were due to volatility in the rate of price increases, with swings in the prices of oil and other commodities also a factor. There is early evidence that the underlying rates of price and wage inflation may be creeping up in the developed world, but the chances of a major "breakout" are remote—global inflation in 2020 is only expected to be 2.7%.

8) The global monetary easing cycle will probably come to an end

As growth faded in 2019, the Fed and other central banks enacted monetary policy easing. Signs of solid growth in the United States suggest that the Fed may not feel the need for further "insurance" cuts. In fact, IHS Markit believes that there is a better than 50/50 chance that the Fed will raise rates once at the end of 2020 and again in 2021. While the challenges facing the ECB are more complex, the recently strong opposition to negative interest rates may imply that any further easing will proceed cautiously.

9) The US dollar will rise a little more

The US economy has been growing faster than most other developed economies and interest-rate differentials between the United States, on the one hand, and Europe and Japan, on the other, favor dollar-denominated assets. In addition, the greenback enjoys safe-haven status - along with the Japanese yen and the Swiss franc - meaning that when investors get jittery, they tend to pile into US bonds and stocks. Ironically, the escalation of the trade war has exacerbated this phenomenon—thus undermining attempts to improve the competitiveness of US companies by imposing tariffs on non-US suppliers. Going forward, these dynamics are likely to stay in place, but ease a little. We expect the US dollar to climb another 3% over the next two years, before beginning a long and gentle retreat.

10) Despite historically high levels of policy uncertainty, recession is still not the most likely scenario in 2020

The risks facing the global economy remain daunting: in the near term, the biggest threat is either an escalation of the US-China trade conflict or its spread to other parts of the world, notably Europe. Another potential for a policy mistake is the hesitation on the part of many governments, especially in the eurozone, to provide more fiscal stimulus. This could become a serious problem the next time growth falters. In the medium term, the high and rising corporate debt levels in both developed and emerging markets are a major threat to the current expansion, when (if) interest rates begin to rise.

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Posted 17 December 2019 by Nariman Behravesh, Ph.D., Senior Economic Adviser, IHS Markit