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Weekly Talking Points

November 29, 2019
Global Growth: The Great Debate
Douglas Porter, CFA, Chief Economist,, +1 (416) 359-4887
Be it resolved: After a sub-par year for the global economy, growth will pick back up in 2020. This is the crux of the debate that we, many other forecasters, and financial markets are grappling with as the turn of the calendar rapidly approaches. If growth does indeed revive, monetary policy will stop easing, and could even shift gears at some point, yields would mount a comeback, and earnings would find serious support. If, however, growth flags further, we could see renewed policy easing, a deeper dive in yields, and some serious downward pressure on earnings. So, suffice it to say, this is a critical issue.

Framing the debate with some figures: With just one month left in the year, it now looks like global real GDP will come in at a meagre 2.7% in 2019, down heavily from 3.6% last year, and the slowest pace since the recession-wracked year of 2009. We view a “typical” year for the global economy as closer to 3½% growth, so this year’s outturn is both well below potential and below average. Will it stage any kind of a comeback in 2020?

Arguing for the affirmative:
  • Trade war: The single biggest drag on global growth this year was the shockwaves from the U.S./China trade war, which slammed supply chains and thus manufacturing pretty much around the world. If the Phase One deal can be signed off, perhaps even with some tiny tariff relief, this would lift a big weight off the outlook. Even a stalemate on this front would remove a negative.
  • Financial markets: Buoyant equity markets certainly seem to suggest that growth is poised to revive. After all, last year’s sour stock market performance, especially in Q4, did a fine job of foreshadowing this year’s soft growth reality. Following a 10.1% drop in 2018, the MSCI World index is currently sitting on a fat 21% year-to-date gain. Beyond just the signalling effect of record equity market highs, there is also a wealth effect that could flow from the rapid rise in asset prices.
  • Easier central bank policy: A wave of rate cuts and other steps to loosen monetary policy by a wide variety of central banks really only began in earnest in the second half of the year. And, traditionally, the full impact of such easing measures takes 12-18 months to work through the economy. For example, the three rate cuts by the Fed only began in late July, and the full effect on growth is only just beginning to show up now in such interest-sensitive sectors as housing. Similarly, the year-long descent in bond yields is also just starting to affect the data.
  • Election year/leap year: It is no myth that growth tends to be firmer in U.S. presidential election years, which also happen to be leap years. In all seriousness, the extra day represents a 0.3% addition. In the post-war era, U.S. GDP growth has been 0.5 ppts higher on average in leap years than non-leap years, a gap which has been sustained even in the past four decades. That pattern has been almost precisely echoed in Canada as well. Whether it’s election-related spending, an easier policy backdrop in the pre-election period, the extra shopping day, or even the summer Olympics, the facts show that every fourth year does tend to be a bit better for global growth.
Arguing for the alternative:
  • Trade war: It is disconcerting to say the least that we are seven full weeks after the rough outline of a Phase One agreement was reached and, yet, there is still no deal. This was initially viewed as a short-term fix, with only minor concessions, just to tide us over until the hard bargaining begins—and the two sides can’t seal the deal. We have long been on the pessimistic side on the medium-term outlook for U.S./China trade relations, and view this as the single biggest risk to the 2020 outlook.
  • Momentum/leading indicators: Even with the powerful comeback in financial markets, the broader leading indicators continue to point to weaker growth, not a comeback. And that goes for either the U.S. indicators or the broader OECD figures. Consumer confidence and business sentiment are sagging. True, the U.S. Treasury yield curve is no longer inverted, but it remains quite flat, hardly a ringing endorsement for the growth outlook. And, Canada’s curve remains stubbornly inverted, with 10-year yields a hefty 27 bps south of overnight rates.
  • Lack of room to grow: There’s no doubt that multi-decade lows on jobless rates right around the advanced world are cause for cheer. However, it also means that the supply side could act as a real constraint on growth over the next year. The working age population in the OECD is now growing by just 0.2%-to-0.3% per year, putting a firm cap on potential growth at this advanced stage of the cycle.
  • Lack of policy room: With many central bank policy rates already negative, the Fed having cut rates three times already, and still-large budget shortfalls in many major OECD economies, there’s not a lot of wiggle room for policy to support growth. While a severe weakening in the global economy would prompt emergency actions, including much wider budget deficits, policymakers would likely be loath to respond to a more moderate slowdown, given their lack of available tools.
And the winner is: We call it a draw. Our official forecast on global GDP looks for another sub-par outcome in 2020 at 2.8%, virtually unchanged from this year. (We’ll put that extra tenth down to the leap-year effect.) Essentially, it may all hinge on the outcome of the Phase One trade negotiations; thus, why the market is so remarkably sensitive to any news on that front—even when the “news” is not so new.

With Canada reporting its Q3 GDP today, we now have results from all G7 economies for the quarter. Growth was remarkably subdued throughout the advanced world in the summer quarter, with the U.S. coming in at the top of the heap—such as it was—with a revised 2.1% pace, and Japan at the back with 0.2% growth. It’s a similar picture over the past four quarters (see attached chart), with the U.S. winning the race of the turtles with 2.1% y/y growth, while Germany (0.5%) and Italy (0.3%) trail well behind. For the record, Canada sits quietly in second spot on both the quarterly basis (with its no-surprise 1.3% reading today) and on a y/y measure (a bit better than expected at 1.7%). The point is that the chillier growth has affected all major economies, and this year’s slowdown was very much a team effort.
Finally, note that a number of economies have dipped into at least a technical recession, with Mexico the biggest victim (GDP there was down 0.3% y/y in Q3). And, there’s nothing technical about the downturns in Turkey, Hong Kong, or Argentina, all of which will most likely print declines in GDP for all of 2019.
Douglas J. Porter, CFA | Chief Economist | Managing Director, Economic Research