Economic outlook 2020/21: Slow recovery

| 17 Jan 2020

Allianz assumes that global economic growth will remain subdued this year and next. "We expect GDP growth to slow further to 2.4% in 2020 from 2.5% in 2019. However, from the second half of 2020, we expect the pace to accelerate again and forecast that the global economy will grow by 2.8% in 2021. Political uncertainties remain, but they are unlikely to reach the record levels of 2019," said Ludovic Subran, Chief Economist of Allianz SE. Against the background of this growth scenario, Allianz expects global insolvencies to increase by 6% in 2020, after 9% in 2019

The trade conflict between the USA and China is unlikely to escalate any further in 2020, although no substantial easing of tensions is expected. Since a further increase in tariffs in the election year 2020 is unlikely, the economists at Allianz forecast that the average US tariff will remain unchanged at 7%, after 3.5% in 2018. Against this backdrop, growth in world trade will remain moderate and is expected to reach 1.8% in 2020 and 2.5% in 2021. This is slightly stronger than last year (1.2%), but significantly below the pace of expansion before the outbreak of the trade conflict: in 2017 and 2018 world trade grew at an average rate of 4.7%. 
This weak growth in world trade is burdening the economic conditions in the euro zone and especially in Germany. The euro zone is expected to grow by 1.0% in 2020 and by 1.3% in 2021, thus remaining below the potential growth rate of 1.4%. However, there are many indications that the momentum of the eurozone economy will bottom out in the fourth quarter of 2019. Private consumption will remain the mainstay of growth thanks to the favorable labor market situation and robust wage growth. Brexit is unlikely to be a major problem for the eurozone in 2020, although weak growth in Germany puts the breaks on development. Particularly important downside risks for the euro zone economy remain the fragile government coalitions in Italy and Spain and the threat of US import duties for the automotive sector. 
Although a recession could be avoided in Germany in 2019, the growth prospects for the next few quarters are muted. The high dependence of the German economy on exports and the problems of the automotive industry are too much of a burden. Only in 2021, when world trade is expected to pick up, growth in Germany should return to a more solid foundation. Private consumer demand and investments in the construction sector will remain the main sources of growth in 2020 and 2021. Overall, Allianz forecasts growth of 0.6% for Germany in 2020 and 1.1% in 2021. 
The economists at Allianz expect a very expansive monetary policy on a global level in 2020. The Fed is likely to continue its easing with an interest rate cut in March 2020 in order to overcome the recession in the manufacturing sector, and only start to normalize from the second half of 2021 (+50 basis points). The ECB is expected to cut the deposit rate further by 10 basis points to -0.6% in April 2020. Monthly QE purchases are expected to remain at the current level of EUR 20 billion per month until the end of the year. The Chinese central bank and several central banks in emerging markets will also continue to ease their monetary policy in 2020. 
In addition to the trade conflict, political risks will continue to be a major factor determining developments in 2020 and 2021. "The strong social tensions in many countries will persist and require a more active financial policy with a strong emphasis on distribution policy. The political situation in the most important European countries is fragile and the US presidential elections will also have a significant political impact," said Subran. The Allianz does not expect any reduction in (geo)political tensions in the Middle East. The unrest in Latin America (Chile, Colombia, Bolivia, Ecuador, Peru) and Hong Kong is expected to continue at least in the first half of 2020. 
From an industry point of view, it is mainly the locally-based companies that will win. The expansive monetary and fiscal policy will continue to benefit domestic demand in particular. Local companies (e.g. services and construction) will benefit more than companies that make profits abroad or rely on globally integrated supply chains. The automotive industry continues to face headwinds, but Allianz expects the situation to stabilize in the period 2020-2021. However, any recovery in the automotive sector depends on a revival of the Chinese market. 

This report is brought to you by  Economists of Allianz SE.



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