ECONOMIC & FIXED INCOME COMMENT: " Deja vu.... Is it 2020 or 2019?"
2019 was the year of political uncertainty. Consequently, global GDP suffered with a series of downgrades. Global GDP is projected to grow at 3% for 2019, the weakest pace in a decade. The main culprits were the US-China trade war, Brexit and USMCA. To support their economies several central bank policymakers responded by providing further monetary stimulus to preserve the decade-long expansion. Although some of the fog has cleared with respect to the political front much is unclear. Nonetheless, the combination of accommodative monetary policy and further clarity on the geopolitical front will contribute to a slightly more positive outlook for 2020. Global GDP is forecasted to be 3.4%. The geopolitical events to watch out for in 2020 are the US-China Trade Deal and Brexit.
With Respect to Brexit, the United Kingdom will formally exit the European Union at the end of January and start the long 11 month negotiating process to determine a free trade agreement between the U.K. and Europe. As a result, GDP for the U.K economy will be further dampened with growth forecasted below 1% for 2020.
The US-China trade war has been at the forefront of discussion throughout 2019. However, there was good news to end 2019 and carry forward into 2020. A preliminary agreement between the United States and China “Phase 1” is anticipated to be signed at the White House in mid January. Although not as comprehensive as originally planned, its a start. To summarize;
China will boost its U.S. goods imports by US$200 billion over two years (this includes increased purchases of soybeans and other farm goods).
China has also agreed to stop forcing U.S companies to hand over technology and trade secrets as a condition to gaining access to China’s markets.
the Unites States dropped plans of imposing tariffs on US$160 billion of Chinese goods as well as cutting tariffs on another US$112 billion of Chinese goods from 15% to 7.5%.
Focusing on the U.S. economy, growth is on track to slow from 2.9% in 2018 to 2.3% in 2019. The slowing of growth can be attributed to the fading impact of the 2018 tax cuts and trade war uncertainty. However, the bright spots continue to be the U.S consumer and the services-sector. We expect the consumer to remain strong with low unemployment, solid wage growth and stable interest rates. Pulling these economic factors together, economists are forecasting U.S. GDP growth of 2% in 2020, a continuation of the slowing growth trend. The US Federal Reserve (Fed) delivered three consecutive rate cuts since the summer to mitigate the risks of a slowing global economy while inflation remained well contained around 2%. Moving into 2020 we expect the Fed to remain on hold unless there is a major negative economic event such as an escalation of the Iran-US conflict.
Canada's economic outlook for 2020 will be similar to 2019. Low interest rates, a robust labour market, the potential for government spending and growth in both residential investments (real estate) and household consumption (the consumer) will support moderate growth. GDP for 2019 and 2020 is forecasted at 1.7%. The challenges for 2020 will continue to be weak business investments and sluggish exports. The Bank of Canada (BoC) was the only central bank of an advanced economy that held their bank rate steady through 2019. The main concern for the BoC is household indebtedness and its sensitivity to rising interest rates. Having said that, they were worried that by lowering the Bank Rate it would encourage consumers to borrow more and make this situation worse. As a result, there is a possibility for one rate cut in 2020 for the BoC to offset the negative impacts on household finances.
During 2019 interest rates declined with the chatter of a global recession. The 10-year Government of Canada bond yield which started the year at 1.95%, hit a low of 1.09% and ended the year at 1.61%- quite a volatile performance. As interest rates decline, bond prices rise; this created attractive returns for investors. During 2019, Government of Canada bonds returned 6.87%. Corporate bonds were the sector winner with a return of 9.65% while Provincial bonds were close behind at 9.07%. Moving into 2020 we anticipate relatively stable interest rates and the rate of return on bonds to be between 2.5%-3.25%. Furthermore, Provincial and Corporate bonds will continue to outperform Government of Canada bonds.
We do not see a global recession in the next 12-18 months however; there will be several headwinds for the North American economy to withstand domestically and globally (BREXIT, US-China Trade War, etc.). Both Canada and the US economy will expand in 2019 and continue into 2020, albeit at a slower rate. To support economic growth, Canada, the US and other advanced economies will have to use a combination of monetary policy (lowering of interest rates) and government spending (fiscal stimulus) to support growth.