Economic growth forecast: about 3% 

Upside opportunities include:

• Progress toward a resolution of the US-China trade war.
• Significant fiscal stimulus from China or elsewhere.
• Clarification on a Brexit outcome.

Downside risks include:

• An escalation or spread of trade tensions. 
• Greater geopolitical disruption that leads to military conflict, higher oil prices, and/or increased economic policy uncertainty.
• An increasing likelihood that trade wars could become currency wars — if the US attempts to weaken the US dollar and other countries react.
• Further gridlock on Brexit.

As we look ahead to 2020, it’s clear that central banks are still shouldering the burden for stimulating the economy via monetary policy, as has been the case since the Global Financial Crisis. After a nascent attempt at normalizing, some major central banks have become more accommodative as 2019 has progressed. That should bode well for 2020, as the rate cuts enacted by the US Federal Reserve (Fed) in 2019 have already resulted in an acceleration in money and credit growth. However, we believe such monetary easing should be more positively impactful for asset prices than the overall economy. We do believe more fiscal stimulus is needed — although most governments are reluctant to provide it.

We note that there are longer-term implications to an overreliance on monetary policy, but that is unlikely to be an issue in the coming year. Countering the positive effects of monetary stimulus is geopolitical disruption — and the economic policy uncertainty that comes with it. Sources of policy uncertainty include:

• The US-China trade war and Brexit, which have been the most prominent creators of uncertainty in 2019. 
• The 2020 US presidential election, which will kick into higher gear after the New Year. 
• The tensions in Hong Kong.
• Tensions in the Middle East, including the September drone attack on Saudi oil facilities that remains to be addressed. 

Economic uncertainty is likely to continue to depress capital spending, in our view, and we must watch vigilantly to ensure it doesn’t spill over into diminished hiring plans.

The dichotomy between the manufacturing and service sectors of the economy continues, as we expect manufacturing to continue to experience weakness largely due to the trade wars. However, those economies with less exposure to manufacturing are likely to fare better in this environment, in our view. 

Eurozone outlook

Economic growth forecast: about 1% 

Upside opportunities include:

• A resolution of the US-China trade war, which would likely boost Chinese and US demand, as well as German fiscal stimulus.
• Removal of tariffs targeting European goods.

Downside risks include:

• A further global demand slowdown.
• An unstable political environment leading to uncertainty and a no-deal Brexit, which could create a one-time shock to the system.

We expect economic growth of about 1% or less in 2020. The economy has been negatively impacted by a lack of fiscal stimulus as well as the US-China trade war, and those factors are likely to be present in the coming year. 

The eurozone has been having great difficulty in generating an adequate policy response. We expect the weakness in the manufacturing sector to bleed over into the services sector at a greater extent. We are starting to see initial cracks in the labor market in Germany with working hours being reduced, which is likely to carry over through 2020. The overall story is weak.

And yet the bigger issue is that the eurozone is not working as it was intended to — being a monetary union but not a fiscal one is creating enormous challenges. One challenge continues to be a significant capital imbalance between periphery and core eurozone countries.

Geopolitical risks should continue to be an issue for the eurozone. In Italy, we worry about higher political fragmentation. The reality is that so far the only hard number in the Italian budget law is the deficit. While the new Italian coalition is much more willing to interact in a constructive way with the European Union (EU), there is a significant chance in 2020 that the majority coalition collapses, especially in the back half of year. GDP growth expectations for Italy fall in a range of 0% to 0.4%. 

We expect the European Central Bank (ECB) to remain accommodative in 2020, continuing QE purchases and possibly even cutting rates again. If governments, especially Germany, appear unwilling to provide fiscal stimulus, we could see the ECB explore more experimental monetary tools — particularly ones that could mimic fiscal stimulus. However, we’re mindful that dissent against monetary easing plans by outgoing ECB President Mario Draghi may make this task more difficult for new ECB President Christine Lagarde, as she is seen as a consensus builder. Therefore, further monetary easing may not be possible in the absence of a deeper downturn or outright recession.
 

UK outlook

Economic growth forecast: less than 1% 

Upside opportunities include:

• A managed EU exit.
• The revocation of Article 50.
• A positive turn in the global economy.

Downside risks include:

• A no-deal Brexit.
• Rolling EU exit deadlines, which would extend policy uncertainty.
• Further deterioration in the global economy.
• An early election that leads to a less business-friendly government.

We expect the UK economy will grow at less than 1% in 2020. The economic policy uncertainty created by Brexit has depressed business investment and business confidence.

As of this writing, the Dec. 12 election looks like a three-way race with different leading parties offering quite different visions for the future of the UK: 

• On the right, UK Prime Minister Boris Johnson and the Tories envision turning London into a so-called “Singapore on Thames” that could attract foreign investment through low taxes and minimal regulations. In practice, they have been moving the UK closer to the US model of capitalism.
• On the left, Opposition Leader Jeremy Corbyn and the Labour Party have in mind greater protection of workers’ rights, partial re-nationalization of privatized industries and education, and a more “corporatist” approach — a platform that is actually considerably further to the left than the EU model. 
• In the middle, the Liberal Democrats and others who want to remain in the EU are in effect saying that the EU model of capitalism — a strong welfare state with labor protection and regulated competition — works just fine for the UK. 

Liberal Democrats will likely campaign to remain in the EU. Labour may seek a second Brexit referendum to confirm the results of the first. And the prime minister wants to get Brexit done on the basis of the deal he negotiated in October, essentially rendering the election as a referendum on himself and his version of Brexit.

Johnson’s deal (which would need to be ratified by the UK and EU parliaments) seeks to keep Northern Ireland aligned with the EU, with a customs border in the Irish Sea. The UK mainland would then be able to engage in regulatory divergence from the EU after the transition period (currently slated to expire at the end of 2020). Depending on the election result, this might simply end up moving the no-deal goal post to Dec. 31, 2020, or Jan. 31, 2021, or potentially later.
 

Japan outlook

Economic growth forecast: about 0.4% 

Upside opportunities include:

• Improvement in global demand and the end of inventory adjustments, which should normalize industrial growth.
• A pick-up in investment demand in Asian economies (including demand for relocation), which could support capital goods exports and positively impact the Japanese economy. 

Downside risks include:

• The possibility that growth in Chjna’s capital goods demand stays low.
• A shrinking population, which has the potential to create severe labor shortage problems and pressure consumption.

We expect the Japanese economy to stabilize in early 2020 after a fourth-quarter 2019 deceleration caused by the effects of the new consumption tax. We then expect the economy to modestly re-accelerate. Our base case expectation for GDP growth in 2020 is approximately 0.4%.

We believe the increased tax burden should slow consumption demand, although the impact should be much smaller than what we saw with the 2014 consumption tax increase. We believe the Japanese government is likely to initiate accommodative fiscal policy to help counter the headwinds created by the new consumption tax. We also believe the Tokyo Olympic Games will increase tourism and help boost economic growth.

We don’t expect the Bank of Japan (BOJ) to ease policy unless the yen strengthens significantly. However, if the yen does strengthen, we expect the BOJ to consider a variety of policy tools including additional purchases of equity exchange-traded funds (ETFs), if necessary. In addition, four other potential policy easing measures mentioned by Governor Haruhiko Kuroda include: 

• Cutting the short-term policy interest rate
• Lowering the target level of yields on 10-year Japanese government bonds 
• Expanding asset purchases 
• Accelerating the expansion of the monetary base

Other emerging market outlooks

Economic growth forecast:

• India: 5.5% to 6%
• Asian EM: about 6.2%
• European EM: about 2%
• Latin America: about 2%

India

We expect GDP growth in India to be about 5.5% to 6% for the year. We expect growth to slow earlier in 2020 and then modestly re-accelerate, helped by the planned corporate tax cuts for next spring. We expect economic growth to slightly underperform expectations next year.

The Indian economy has been slowing sharply, with consumption recently taking major hits following weak investment. Auto sales in particular have been disappointing. We expect that weakness to continue into early next year.

However, we believe the economy will benefit from significant fiscal and monetary stimulus over the course of the year. The Reserve Bank of India appears poised to provide further accommodation, and corporate tax cuts should be very stimulative, in our view. However, there are longer-term negative implications given that the true fiscal deficit is high and some of the impending fiscal stimulus could be financed by the Reserve Bank of India (profits, capital, dividends). In addition, financial sector reform and general structural reforms are still lagging.

Asian emerging markets

Growth in Asian emerging markets remains strong, although we expect it to modestly decelerate. We expect economic growth in 2020 to be approximately 6.2%, led by Indonesia and Vietnam, which have been benefiting from trade war supply chain disruptions. Small, open economies such as Hong Kong and Singapore could experience lackluster economic growth.

European emerging markets

• We expect more modest economic growth in European emerging markets in 2020 — approximately 2%. 
• We expect Poland to experience solid growth, helped by structural reforms and solid domestic demand. (One downside risk is if elections produce a shock.) 
• Meanwhile, we expect Turkey and Hungary to fare worse, as populist leaders in both countries face a hostile external economic environment. Turkey is too dependent on external financing, in our view, and Hungary is too dependent on German car manufacturing.

Latin America 

Our expectations for GDP growth in 2020 are modest at 2% (versus a consensus about 2.4%). 

• We expect Brazil to fare well as its policy is pro-growth. Brazilian social security reform is making progress and raising hopes for deregulation and privatization. 
• The combination of ongoing reform efforts points to a continued recovery for Brazil, but probably at a gradual pace given the limited expected lift from commodity export prices and volumes in a still-low-growth global economic environment. 
• Brazil continues to transition from state-directed subsidized credit via the national development bank to a more market-oriented funding for corporates. Financial inclusion should also help contribute to an increase in household spending power over time given low inflation and monetary easing (in contrast to previous credit booms and busts).
• We expect the Mexican economy to decelerate modestly on weaker investment amidst policy uncertainty, as well as relatively low US growth. 
• In Argentina, the Peronist Party won the presidency as widely expected, but the margin was much smaller than feared, with former President Mauricio Macri only about 8% behind President-elect Alberto Fernandez — a much smaller differential than in the primary, which had sparked a severe sell-off across Argentinian assets and the peso. This moderate margin suggests that the new administration will need to be politically circumspect as it goes about renegotiating its IMF deal and restructuring the sovereign debt, which should limit the downside risk in the economy and markets in the short term. 
• A positive factor for Argentina’s Latin trading partners is that net export effects and confidence concerns should be much less of a drag than they were in 2018-19 (thanks to reduced downside risks and reasons to expect stabilization first and then recovery – even if not a sharp rebound in activity). Among the major EMs, Brazil stands to be the main beneficiary.
• Argentina’s heavy overhang of debt, distortions from energy and other subsidies that still need to be removed, and the resulting inflationary pressure are significant, and we would not expect a v-shaped rebound in 2020. 
• In contrast, we expect Venezuela to fare worst in Latin America, given hyperinflation and continued political chaos. Neighbors and trading partners in the Andean region would continue to experience socio-economic repercussions from continued refugee migration, but we expect the economic and financial effects to be limited as this is now a long-running crisis. That said, we would not rule out an even sharper collapse of the Venezuelan state or economy.