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The Year Ahead
The Global Economy 2020: A Positive Outlook Shadowed by China, Debt, and Trade Tensions
Experts expect growth to rebound, but many of their projections are built on shaky foundations.
After a rocky 2018 and truly rough patches in 2019, especially particular sectors such as global manufacturing and U.S. agriculture, the consensus outlook for the global economy next year is surprisingly sanguine.
Most mainstream forecasters expect that the worst of the storms are past, and they are expecting global growth to rebound: the International Monetary Fund by 3.4 percent, the World Bank by 2.7 percent. One big reason for the dose of optimism is the generally looser approach to the money supply taken by central banks around the world, which helped offset some of the pain of trade wars and falling investment in 2019 and promises to allow a modest rebound next year (but which carries its own risks).
But those growth expectations are premised, in both cases, on a couple of potentially tenuous foundations: a rebound in emerging markets, such as Argentina and Turkey, that have been hammered in recent years, and a halt to further nasty surprises like trade wars, imploding markets, debt time bombs, and the like. Economists expect the wild cards for 2020 to point in one direction: downward.
“[D]ownside risks seem to dominate the outlook,” noted the IMF in its latest big report on the global economy’s prospects. Whether it’s still-simmering trade tensions, the ongoing Brexit saga, China’s economic transformation, worries about a sharp market correction, central banks with few bullets left to fire, historically massive piles of debt, or the usual geopolitical risks that could upend the best of projections, here is a look at some things to keep an eye on that could make or break the global economy next year.
Despite the preliminary agreement between the United States and China of a “phase one” trade deal that promises at least a cease-fire between the world’s two biggest economies, the trade wars are far from over. That “phase one” deal with China isn’t yet a done deal—and similar agreements have come undone in months past.
Even if U.S. President Donald Trump and Chinese President Xi Jinping finally ink some sort of truce that will see a partial restoration of trade amity between the two countries, most of the tariffs the Trump administration imposed on China (and those Beijing slapped on the United States in return) will remain in place. What the Peterson Institute for International Economics calls a “new normal of high tariffs” will mean that about two-thirds of Chinese imports to the United States and more than half of U.S. exports to China will remain taxed at relatively high levels. That means a guaranteed, continued drag on U.S. manufacturers that rely on many of those goods as inputs for their own finished products, adding financial pain for firms, consumers, or both.
And trade tensions aren’t limited to the fight between Washington and Beijing. With a new NAFTA wrapped up and an apparent China truce in hand, Trump’s trade negotiators are returning their gaze to ongoing trade fights with Europe, which include ongoing spats over U.S. tariffs on European steel, U.S. tariffs on European goods due to the Airbus-Boeing dispute (with potentially another set of European retaliatory tariffs in the pipeline), and U.S. tariffs on French goods in response to a controversial French digital tax—a tax that is under serious consideration in several other countries and that could spread that trade fight even further.
There’s more: The United Kingdom will formally exit the European Union at the end of January, but that will only sound the starting pistol for the really heavy lift: negotiating a free trade agreement between the U.K. and Europe before the end of the year, a deadline that European officials feel is almost impossible to meet. Failure to sort out key issues, such as tariff rates between Britain and the continent or regulatory standards between the two sides, could lead to another Brexit cliff edge at the end of the year, with all that entails for new investment, business and consumer confidence, and growth.
To make things more interesting, the United States hopes to negotiate its own free trade deal with the U.K. next year. But that would mean pulling Britain closer to the United States in terms of economic regulation—making it that much harder for the U.K. to close any meaningful deal with Europe.
Ultimately, greater trade tensions between big economies, coupled with the end of the World Trade Organization’s ability to resolve disputes between countries, could mean a return to relatively fettered trade, with countries slapping tariffs on imports at will. The World Bank warns that a return to higher duties across the board could be as devastating for global trade as was the great financial crisis a decade ago.
And then there’s the China question—or rather, questions—which, given the size of the Chinese economy, inevitably loom large in the outlook for the rest of the world.
First, the Chinese economy is clearly slowing, and not just because of the impact from Trump’s tariffs. One big question is what will Chinese growth, already at three-decade lows, look like this year? The IMF expects GDP growth of a paltry 5.8 percent, well below that of recent years, while the World Bank expects a slightly better 6.1 percent growth. As the World Bank notes, one big tool that China has to juice growth—fiscal stimulus—risks aggravating one of the very ills that plague the Chinese economy, namely massive indebtedness. It might work in the short run, but it would risk making barely profitable companies less productive and would impact future growth.
If China does face a big slowdown, the pain will be felt elsewhere, especially among many developing countries that are the linchpin of next year’s consensus expectations for global growth.
“I think a hard landing in China isn’t nearly as likely as many of the other major risks on the horizon for 2020—such as a chaotic Brexit—but if that were to occur, it would have massive effects on other economies and global growth, because China is so deeply interconnected with all other major economies,” said Julian Gewirtz, a China expert at the Weatherhead Center for International Affairs at Harvard University.
And there is a bigger question about the future of the Chinese economy: Will it continue to be as deeply interconnected, or will it redouble its efforts to unwind its economic interdependence with the rest of the world, something that hawks in both Beijing and Washington seem to want?
“The single biggest thing that worries me is U.S.-China decoupling,” said Cliff Kupchan, the chairman of Eurasia Group, a risk consultancy. “The inexorable march by the two countries to separate at least the technology sectors, and possibly more—I fear it will lead to the weaponization of tariffs as the new normal, force third countries to take sides, and act as a real drag on growth.”
And that’s not just a Trump effect. What Kupchan calls the “petrification” of U.S.-China relations is now enshrined in U.S. politics, with lawmakers and Democratic presidential hopefuls all vying to be tougher on China. “It’s a real threat to the global economy and global stability,” he said.
The case of Huawei and Chinese technology already gave a taste of what it will mean if China seeks to make its own economy, rather than its trading partners, its main supplier. Expand that to the rest of the economy, including renewed efforts (despite Washington’s efforts to the contrary) to expand the Chinese model of state subsidies and industrial policy, and you have a taste of the fundamental transformation that could be in store, with potentially big implications for nearly all other economies.
“The big uncertain question is what this truly epochal reassessment of interdependence by top leadership means for the future of the Chinese economy,” Gewirtz said.
Such a move, he said, would involve state capitalism on a massive scale, with the creation of national suppliers for key industries, dismantling of existing supply chains, a reinvigorated industrial policy, and even more industrial subsidies. It would also likely entail China playing offense with the many levers of economic coercion that China has, from punishing South Korea over missiles and trade to cowing the NBA over critical tweets. And it would only invigorate China’s on-again, off-again efforts to finally break free of U.S. financial dominance by accelerating Chinese moves to help craft alternatives to the U.S.-dominated global payments system and the central place of the dollar, which give Washington outsized leverage in pressuring other countries to do its bidding.
“If you are a top-down system and have decided that in multiple domains, from commodities to technology—potentially finance—that you need to become profoundly more self-reliant, that would be a very profound change for 2020,” Gewirtz said. “Things long predicted would finally be coming true.”
The Debt Bomb
Globally, debt—whether corporate debt, household debt, or national debt, whether in developed or developing economies—is at record-high levels, which is itself partly a product of the loose-money policy many central banks pursued to cushion trade and other shocks to the economy. That is itself a cause for concern, as those central banks, with interest rates already low, don’t have a lot of room to cut further to cushion any fresh debt shocks.
And the debt pile is huge. The World Bank, in a special report, noted that global debt levels reached an all-time high of 230 percent of GDP in 2018 and have grown since. Debt growth is particularly alarming in emerging markets, the World Bank says, which hold about $50 trillion in debt, making them particularly vulnerable to any shock, whether a generalized slowdown, or more trade wars, or a financial markets correction stemming from either of the other two. Developing countries have already been through three debt crises—in the 1980s, the 1990s, and the 2000s—with hugely painful consequences. A fourth might be on the way, the World Bank warned, with similarly nasty implications: “The fourth wave looks more worrisome than the previous episodes in terms of the size, speed, and reach of debt accumulation” in emerging markets, the bank found.
The sheer amount of global debt means that any financial market correction—whether triggered by continued trade wars or corporate bankruptcies and defaults or something else—would have immediate impacts, especially on countries with few built-in shock absorbers.
“Renewed episodes of substantial financial market stress could have increasingly pronounced and widespread effects, in view of rising levels of indebtedness,” the World Bank said.
Even advanced economies such as the United States are potentially vulnerable, with a heavily indebted corporate sector. If corporate defaults rise, which could lead overvalued stock markets to plummet, that would have knock-on effects on consumer sentiment, which in turn would have huge impacts on U.S. growth expectations: Fitch Ratings agency expects that would halve its outlook for U.S. growth in 2020 to just 0.8 percent.
“Long-term valuation metrics for US equities are near historic highs increasing the probability of a correction, especially as potential risk triggers such as a hard landing in China or trade-related uncertainties are likely to persist,” said Fitch.
And there are all the usual troubles in the world, from ongoing tension among Iran and Saudi Arabia and the United States to spreading chaos throughout North Africa to the prospect for heightened tensions in Asia, whether over North Korea’s nuclear program or China’s ambitious designs on the South China Sea, Hong Kong, and Taiwan.
There are also good old-fashioned political risks, such as the global resurgence of populism around the world, which in many cases means taking aim at market economics, to the detriment of what drove growth for decades.
“Global leaders have their heads in the sand when it comes to the Fourth Industrial Revolution, and they are going to pay for it,” Kupchan said. “There is little systemic thinking about how to deal with automation, the backlash against globalization, the structural factors against what I call ‘nativistic populism.’” If that were merely a local problem, whether in the United States or Hungary or elsewhere, that would be one thing. But such political upheavals also threaten many of the very economic sinews that have driven broad-based prosperity since the end of World War II.
“Populism doesn’t trust markets. If you have a structural driver away from markets, you have a hell of a long-term economic problem,” Kupchan said.
In the shorter term, there is enough to worry about. Greater tension, or outright conflict with Iran as a result of the Trump administration’s maximum pressure campaign, would likely send oil prices higher, which would act as a brake on global growth. Intensified protests in the broader Middle East and North Africa, coupled with renewed fighting in Libya and an adventurous Turkey, raise questions about the economic resurgence of many of the region’s emerging economies, themselves a key for global growth this year.
And in Asia, China’s internal economic woes could well find expression in foreign policy, whether in the South China Sea, or over the standoff in Hong Kong, or over Taiwan’s future, which could in turn further roil markets and broader economic confidence.
“A downturn in China would also have significant global effects if it prompted the leadership to adopt an even more nationalistic or adventurist foreign policy,” Gewirtz said.