eco TV Week

What 2019 tells us about 2020


The topics which have characterised 2019 are expected to remain very relevant in 2020: slow growth, elevated uncertainty, low inflation, low interest rates.


TRANSCRIPT // What 2019 tells us about 2020 : December 2019

The key takeaways from 2019

It’s that time of the year again: as the festive season approaches, economists polish their crystal ball and produce an outlook for next year.

In gauging what 2020 may bring, 2019 actually offers many insights, so looking in the rear view mirror is actually a useful exercise.

Let’s start with the key takeaways of the year which is almost over.

Firstly, global growth has slowed down. It started with exports, then moved to manufacturing and eventually impacted services, though this sector has been quite resilient.

Secondly, uncertainty has been a very frequently used word although assessing the impact on growth is difficult. It did not stock markets in having a superb performance, so they have climbed a wall of worry, with the help of lower interest rates. Corporate investments have weakened in the US but were strong in the eurozone.

Thirdly, monetary policy has been eased further by the ECB and the Fed changed direction. This reflects that these central banks, cognisant of their limited room for manoeuvre, are risk averse: if you want to reach your inflation target, make sure to avoid a big growth slowdown. Yet there is now a feeling that the limit has been reached or that we’re at least close to it. Hence the renewed interest in fiscal policy but also the strategy review conducted by the Fed and soon to be started by the ECB.

Finally, climate change has moved to the top of the agenda, at least of households and companies, less so unfortunately for certain governments, witness the disappointing COP25 summit in Madrid.

2020: more of the same

Next year will probably bring more of the same in a number of areas.

Growth is expected to remain on the slow side. The stabilisation of survey data in recent months creates hope that, on the back of the supportive monetary/fiscal policy mix, some growth pick-up would materialise. In the absence thereof, disappointment would follow, leading to even slower growth.

To some degree this depends on what happens to uncertainty. Trade tensions may ease (think of US versus China) but will not disappear. They may actually intensify (think of US versus the European Union). On Brexit, difficult negotiations about the future relationship mean that hard Brexit fears will not disappear.

Inflation is expected to remain low or, in the eurozone, too low. Slower growth implies slower wage growth which makes an acceleration in inflation a more remote possibility.

Official interest in the US and the eurozone will remain very low. Christine Lagarde has said that even 1.6% inflation in 2022 would not be satisfactory, which should be read as ‘does not justify a rate hike’. In the US we actually expect two rate cuts in the first semester in reaction to slower growth.

2020: year of change

Next year may bring change in at least two areas.

The results of the strategy review of the Fed about its objectives, its tools and its communication will be eagerly awaited in the first half of 2020. Any hint at ‘low for longer’ would have an impact on financial markets and the dollar. It will also trigger speculation about whether the ECB, which will also be conducting a strategy review, will follow the Fed’s change in emphasis should there be one.

Hopefully, next year will bring significant change in terms of how to address the huge challenge of global warming. The disappointment of the COP25 in Madrid last week makes the COP26 crucially important and we have to hope that the British government will come up with an ambitious agenda as organiser of the summit.

The recently announced Green Deal of the European Commission with the ambition to make the EU carbon neutral by 2050 has raised expectations of policy measures such as a carbon border tax in order to create a level playing field between production in the EU (and the associated emission regulation) and imports from countries with a looser regime.

In this respect, the ECB will also be watched carefully: Christine Lagarde has made it clear that she was ready to make aggressive strides toward environmental objectives. Howevern, in the ECB’s governing council, opinions are divided as many fear that that the ECB might enter a political minefield.

Thank you for watching EcoTV Week and I invite you to join us again next week.

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