News

Bruno Cavalier
Chief Economist at ODDO BHF

Since 2018, world economic growth has been dragged down by the downturn in the manufacturing sector against the backdrop of a “trade war”. For a large part of 2019, the question that most preoccupied investors and economists was whether the US and, with it, the rest of the world, would fall back into recession. Over the summer, these concerns almost entered irrational territory. As we enter 2020, general sentiment is calmer and more in tune today with the real economy, whose situation is far from catastrophic. In this note, we will examine in the form of a Q&A the key questions likely to shape the economic outlook.

• To sum up all the events that marked 2019, it could be said that this was the year when the much-feared recession did not take place. This concern spread like a virus over the summer. Everything was used as a pretext to forecast a recession; but two factors particularly fed these fears.
• The first is the state of manufacturing. Manufacturing activity is contracting in a large number of countries, and in some, such as Germany, the crisis is very severe. It would be simple – but incorrect – to believe that manufacturing is an infallible guide to fluctuations in the whole economy. In reality, the main characteristic of the current business cycle is that problems in manufacturing have barely contaminated other sectors. A decoupling has taken place, illustrating the very different situation between world trade and domestic demand, with downside risks on the one hand and neutral risks or upside on the other. At present, some industries, such as the automotive sector in Germany or the aerospace sector in the US, continue to face structural problems, but the general picture is that global manufacturing confidence is past its trough. The easing of trade strains between the US and China probably has something to do with this.
• The second source of anxiety lies in the interest-rate environment. Nominal interest rates are low everywhere, or even negative, leaving little space for monetary loosening to rescue the economy if necessary. The yield curve is also flat in many places and has even inverted at times. This signal is supposed to presage a deterioration in the growth and inflation outlooks. Without going so far as to claim that long-term bond yields have become “false prices” as a result of central banks’ increasing grip on the government debt market, the signal conveyed by yield curves is undoubtedly harder to analyse than in the past. The interest-rate environment is widely seen as abnormal, causing obvious pain to the financial sector, banks and asset managers. There is nothing like the financial sector for spreading and magnifying real economic shocks. Last year, central banks, led by the Fed, took the bull by the horns with loosening measures. While it is fashionable to say that monetary policies have lost all their effectiveness, this is not what we have observed in the wake of these decisions. Financial conditions have indeed eased, providing more oxygen to the world economy. In the absence of a true overheating, central banks are not taking much risk in maintaining such accommodative policies. Even if inflation picks up in 2020, as is likely, there is no prospect of any monetary tightening.
• All in all, despite a struggling industrial sector, stagnant global trade in goods, and a bleak rate structure, the expansion phase that began more than ten years ago has not ended. In truth, most of the growth slowdown took place in 2018, not in 2019. Over the past four quarters, world real GDP has grown at a fairly stable annualised pace of around 3% q/q. In our opinion, this looks more like a floor than a ceiling for the year ahead.

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