Talking Points
December 13, 2019 | 13:47
Outlook 2020: “I Can See Clearly Now”
Gone are the dark clouds that had me blind, but is it gonna be a bright, bright, bright sunshiny year? With deep apologies to Johnny Nash, and his 1972 classic, it's amazing how the world has changed in the blink of an eye in the past week, or the past year, or even the past decade. This week had long shaped up to be a critical one for events, but few could have even imagined such a wave of near-resolutions on so many fronts, and so many obstacles in our way. From U.S./China trade, to USMCA, to Brexit, to U.S. government funding, and even to the impeachment proceedings, the news came fast and furious, providing at least some clarity on the most pressing issues for investors. The major asterisk to the generally good news is that the most important issue of the bunch—U.S./China trade—still carries plenty of questions, even on the limited Phase One deal. |
The subject of this piece is aimed mostly at the outlook for the next year, so we’ll focus mainly on what this means for the broader economic landscape. The contrast to the financial backdrop of a year ago is nothing short of staggering. Last December, we were staring down the barrel of almost a full-on bear market in stocks, amid a world of uncertainty. And that deep dive in equities did an excellent job of foreshadowing a marked cooldown in the global, and U.S., economies after a spell of strong growth for both. So, it is perfectly reasonable to suggest that this year’s global equity market romp foreshadows some upside risk to the 2020 outlook—and it has been a long time since we have been able to talk about upside risks with a straight face. A key feature of this past year was the mismatch between rip-roaring financial markets almost across the board, set against the backdrop of a chillier-than-expected global economy, and a raft of geopolitical flashpoints. But, the seeming conundrum can be largely explained by the sudden U-turn to much easier policies by a wide variety of central banks, led by the Fed. Juiced by falling yields, low and stable inflation, and moderate growth, global stocks turned in a consistently strong performance. Just this week, the MSCI World Index finally returned to an all-time high (for the first time since early 2018 on the US$ version) and is on track for its second best annual gain for the decade at more than 20%—easily reversing last year’s nasty 10% spill. After a two-year period of above-average growth well north of 3½%, the global economy broke hard over the past year, dipping to its slowest pace since 2009 at 2.7% in 2019. Looking ahead, we see the global economy stabilizing and even improving a touch, although our growth estimate of 2.8% is a mere tick higher than this year’s sluggish out-turn—albeit with the aforementioned upside risk. A slower annual performance is almost baked into the U.S. data, with GDP easing to a 2% clip in recent quarters and poised to slip further in 2020 amid weak capital spending. However, the late-year surge in financial markets sends a clear signal which way the risks lie. Indeed, based on much easier financial conditions alone, it’s not at all unreasonable to expect U.S. growth to perk back up to well above 2% in 2020. Elsewhere, it’s still going to be a challenge for China’s growth rate to top 6% in the coming year, even with a partial stand-down on the trade front. It’s extremely difficult to isolate the trade war impact; but, outside of that direct drag, it appears that underlying growth is struggling, with consumers chilled and local government finances strained. Growth in Europe looks to be bottoming out, especially with a less-hostile global trade backdrop, but this follows a big disappointment in 2019; looking back over this year, the marked cooling in Euro Area GDP to barely 1% may have been one of the biggest downside surprises. While Japan may find some mild support from next year’s summer Olympics in Tokyo, fiscal stimulus, and a trade truce, the weight of the sales tax hike and weak demographics should keep GDP growth below 1% yet again in 2020. For Canada, it was another dull year for growth, with GDP headed for a sluggish 1.7% advance for all of 2019 (almost bang on the call at the start of the year). Technically, we actually see growth picking up a tad in 2020, albeit still coming in at a lacklustre 1.8% clip, or almost exactly what the Bank of Canada views as potential. The three reasons for a slightly firmer pace: 1) Alberta’s oil production curtailments are gradually lifting, after weighing heavily on this year’s growth rate; 2) housing continues to revive faster than many expected across much of the country, providing a rare spark; and 3) fiscal policy looks to add some stimulus over the next year, flowing from the federal election results—up to 0.3 ppts to GDP. Another year of close to potential growth should keep the Canadian unemployment rate broadly stable at just below 6%. The job market was a rare source of excitement on the domestic landscape this year—job gains spent most of the year seemingly on steroids, but were basically banned late in the year, with the deep drop in November sending a scare into analysts. The big picture is that employment is still up 1.6% y/y, or nearly as fast as GDP growth—implying almost no productivity gains—and wages have firmed. With a rebounding housing market lifting borrowing again, and core inflation on target, it will take a downside shock to pull the Bank of Canada off the sidelines. Unlike much of the rest of the world, the Bank famously sat out 2019, and we expect a repeat performance in 2020, even with a new Governor on board by mid-year. As for the currency: a year ago, this piece concluded “we look for only a mild recovery in the loonie amid firmer oil prices and if/when the USMCA is ratified”. Amen to that for 2020. This year will go down in the record books as one of the quietest ever for the loonie, at least in the post-float era. After a quick rally in the opening weeks of the year, reversing a late-2018 slide, the currency then stood fast in a narrow range of 74-77 cents for the rest of the year. True, the loonie will likely finish 2019 as the second strongest major currency (behind only the U.K. pound), but that mostly reflects its weak starting point. We expect the currency to remain range-bound in the year ahead, with another mild upward skew toward the higher end of the boundary. That’s not a bullish Canadian dollar call per se, but more of a cautious outlook on the U.S. dollar, which we expect to lose some altitude amid a less fraught global trade backdrop and heading into the deep uncertainty of the 2020 presidential election. Finally, we would be remiss to not mention a quick wrap-up on the decade, and again the remarkable change from 10 years ago. In late 2009, we were crawling from the wreckage of the Global Financial Crisis, with sentiment still shattered and unemployment rates climbing quickly. Few could have seen then that the next 10 years would bring an historic bull market in equities, an even further decline in long-term yields, and the first decade ever without an outright recession. While it was a wild and woolly stretch—replete with the Euro crisis, QE/taper-tantrum/QT, the oil shock, Brexit, trade wars—we end 2019 with the S&P 500 at an all-time high, and almost triple the level at the end of the prior decade, an annualized rise of more than 11% per year. Here is the rainbow I’ve been praying for; look all around, there’s nothing but blue sky. ************ This week brought a series of jarring contradictions along with the raft of significant developments, which required a whole new level of cognitive dissonance. To wit:
|