• Ludovic Subran

In the footsteps of Sisyphus: The global economy in 2019-20

Just like Sisyphus rolling a boulder up a mountain, only to see it roll down again upon reaching the top, the global economy seems to have gone back to the 2015-16 limbo after two years of strong growth. We expect +2.7% global growth in 2019 and 2020. This way “back to purgatory” finds its roots in a regime of persistently high uncertainty (trade and political risks) and the drawbacks of financial repression, which coalesce into a self-defeating equilibrium.

New measures confirmed our “trade feud” scenario until the end of 2019 and unforeseen transmission channels turned out to have a stronger than expected impact, particularly in terms of financial market reactions (flight to quality, super dovish Central Banks, lower commodity prices), and the uncertainty cost on the economy. Emerging markets have started to feel the pain. The only reason for a limited pass-through are low inflationary pressures, which could be halted with a stress on the Hormuz strait. As a consequence, we have revised our trade forecasts to the downside for 2019 and 2020 (+2.2% in volume terms this year, and +2.5% in 2020, after +3.8% in 2018).

Political risk is not abating. The trade feud could include several battlefields beyond the U.S.-China rivalry. Moreover, all key positions in Europe will be different three months from now, pointing to possible surprises on the policy stance, while several pivotal elections loom ahead in emerging countries. Interventionism, public profligacy and challenging dogmas seem to continue to create market noise, but limited effects are visible on household and corporate confidence.

In the end, recession could be a self-fulfilling prophecy and come from excesses built by financial actors. Inflation expectations and a generalized trend of yield curve flattening mirror poorer economic perspectives. The consensus of economists has significantly revised its forecasts on GDP growth over the last few months, accompanying the loss of confidence observed in the fixed income market. For now there is a disconnect between fundamentals and the equity market, which positively reacted to the dovishness of central banks. We continue to believe a credit event in the corporate segment could occur in the U.S., following a deadlock in budgetary discussions — and a confidence shock. Shallower and shorter-lived than the last recession, the next downturn will test the ability to do the right things at the right time when faced with recession since traditional policy tools and international cooperation are weakened. Private buffers will matter.

Taking into account the size of the current shock of global uncertainty (the U.S.- China trade dispute is expected to last until the end of the year, while U.S. public debt will be a source of instability from Q4 2019), the U.S. economy is expected to grow by +2.5% y/y in 2019 and by +1.7% in 2020, while China is expected to grow by +6.3% and +6.2% respectively. The Eurozone will significantly decelerate at +1.2% y/y in 2019 and 2020 compared with +1.9% y/y in 2018. We also expect seven out of ten countries to register an increase in corporate insolvencies in 2019 and one of two countries to end 2019 with more insolvencies than posted annually before the 2008-2009 global crisis. The upside trend would be even more broad based. Our Global Insolvency Index is forecasted to increase by +7%, both in 2019 and 2020, with a still noticeable increase in Asia (+15% in 2019), a rebound in Europe (+3%) and a gradual trend reversal in the U.S. by 2020.

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