Geopolitical crises and other global disruptive factors are not enough to trigger a recession, says an industry expert, predicting another year of moderate expansion with low inflation for most developed economies for 2020.
Amid the backdrop of geopolitical tensions, trade wars, disruptions to oil supplies in the Middle East and a prolonged downturn in the manufacturing sector in 2019, the global economy continued to grow and did not suffer a recession, noted John Greenwood, chief economist at Invesco, an independent investment management firm.
“There will be much talk of an imminent recession or downturn for 2020 given the anxiety and noise around geopolitical events, trade wars and other concerns, but we see these as temporary disruptions that are unlikely to upset the forward and upward momentum of the global economy,” said Greenwood.
According to Greenwood, the forces underpinning the upswing in the business cycle are the acceleration of large money supply and the state of balance sheets, which remain stronger than the disturbances.
Downside risk to his prediction could come from China and India, where the crisis in non-bank financial institutions is slowing growth, as well as the sluggish banking sectors in Japan and Europe. Upside risk comes from the US, where there has been stronger money and credit growth which could provide an upswing to commodity prices, property prices and equity prices.
Growing money supply
Broad money growth has been accelerating for much of 2019 in several key developed economies. A rise in money supply drives a rise in inflation, interest rates and enables wage growth, and in Greenwood’s view is “the primary reason why Wall Street indices have regularly been hitting new highs.”
In the US, the M3 broad money growth rate tripled from 3 per cent year-on-year at the start of the year to 9.7 per cent year-on-year as of November, the highest rate so far during this business cycle expansion. In the Eurozone, M3 broad money growth accelerated more moderately, from 3.4 per cent to 5.7 per cent year-on-year as of September. In the UK, the M4x broad money growth has started to recover from very low growth rates in the first half of the year as Brexit uncertainty has started to unwind.
“Despite widespread and misplaced anxieties about the risk of a recession in the US last year, the US economy continued to grow at a pace of 2.1 per cent p.a. in the third quarter,” said Greenwood.
For 2020, he sees a continued upswing in economic activity and another year of low inflation, placing the US economy more in the mid-cycle than late-cycle phase. There are several factors that support this view, namely the solidity and strength of the business cycle, sound and largely deleveraged balance sheets in the private sector, low inflationary environment and the easing of monetary conditions, which will support the upward momentum of the economy that can last another couple of years.
For the year ahead, this implies a record eleventh year of expansion since 2009, the longest in recorded US financial history.
Zainab Kufaishi, head of Middle East and Africa and senior executive officer for Invesco said: “Despite geopolitical tensions and trade wars, investors continue to diversify portfolios geographically as they try to balance downside risk in certain markets with the potential to capitalize on opportunities in other markets.”
“We have also noted diversification within and across asset classes as investors look to generate better risk-adjusted returns. Given the challenging market conditions, sovereign investors in the Middle East performed relatively well.
“It is also no surprise that they are looking at emerging markets for investment, particularly China - a greater number of investors from the region have access to that market than others globally. With these factors in mind, the overall sentiment is moderate despite the market headwinds,” he added.