International outlook for 2020: No room for mistakes.

• Author: Bonser-Neal, Catherine

Introduction

As we are approaching the end of 2019, the International Monetary Fund (IMF) is estimating that this year's global GDP growth is unlikely to exceed 3 percent. This constitutes its lowest growth since the financial crisis of 2009. This global slowdown is largely due to the uncertainties created by several trade disputes (see Figure 1). For example, a lot of uncertainty has been driven by continued Brexit concerns and the ongoing trade war between the U.S. and China. Similarly, frictions created by U.S.-European Union trade disputes, Japan-South Korea trade disputes, and an unratified United States-Mexico-Canada trade agreement have contributed to uncertainty and an overall global economic slowdown.

Advanced economies are already suffering from weak productivity growth and an aging population, and the increased tariffs followed by decreased business confidence have added to the structural strains on their growth potential. The group of countries formed by the U.S., Japan and Europe is expected to be a drag on global growth (see Figure 2 and Figure 3).

Figure 2: World real GDP growth Global GDP Advanced economy Emerging & developing growth growth economy growth 2018 3.6% 2.3% 4.5% 2019(p) 3.0% 1.7% 3.9% 2020(p) 3.4% 1.7% 4.6% Note: (p) indicates projections. Source: International Monetary Fund Note: Table made from bar graph. Figure 3: Advanced economies' real GDP growth 2013 2019(p) 2020(p) U.S. 2.9% 2.4% 2.1% Euro Area 1.9% 1.2% 14% Japan 0.8% 0.9% 0.5% Canada 1.9% 1.5% 1.8% U.K. 14% 1.2% 14% South Korea 2.7% 2.0% 2.2% Note: (p) indicates projections. Source: International Monetary Fund Note: Table made from bar graph. The anticipated recovery of economic activity in the emerging markets (see Figure 4) will drive the 2020 global growth estimate of 3.4 percent.

Figure 4: Emerging and developing economies' real GDP growth 2018 2019(p) 2020(p) Brazil 1.1% 0.9% 2.0% Mexico 2.0% 0.4% 1.3% Russia 2.3% 1.1% 1.9% South Africa 0.8% 0.7% 1.1% India 6.8% 5.1% 7.0% China 6.6% 6.1% 5.8% Note: (p) indicates projections. Source: International Monetary Fund Note: Table made from bar graph. The accommodative monetary policy of the U.S., as well as in other advanced and emerging economies, has helped offset the adverse effects of the trade frictions. Without the interest rate cuts from many central banks, the global growth forecast would have been around 0.5 points lower in both 2019 and 2020. However, central banks' policies have reached their limit, and it will become increasingly difficult to appease downside risks if economic conditions further degrade.

The current U.S. economic expansion, which started in June 2009, celebrated its 10th anniversary and became the longest period of uninterrupted economic growth on record. Most economists forecast decelerating growth in the United States. However, we anticipate this slowed growth of 2.1 percent to be the strongest out of the advanced economies in 2020.

Downside risks to this forecast are substantial. The trade frictions are starting to negatively impact manufacturing activity and business sentiment. The latest data from the Institute for Supply Management reported that the U.S. manufacturing index, which monitors changes in production levels from month to month, fell to its lowest level since June 2009. Fortunately, in 2019, slowed business investment continued to be offset by stronger household consumption.

In 2020, consumer spending and low unemployment are expected to continue to support the U.S. economy. As long as consumers retain their income flows (i.e., remain employed) and are willing to spend, the economy will expand.

The Federal Reserve...