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research.hsbcDisclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications inthe Disclosure appendix, and with the Disclaimer, which forms part of it.Q42019Economics| GlobalGlobalEconomicsPlay video withJanet HenryEconomicsGlobalQ4 2019By: Janet Henry and James PomeroyGlobal EconomicsPutting the air back in Central banks are trying to pump the air back into a slowing global economybut using monetary policy to offset damage from US-China trade tensions has its limits and poses risksso fiscal stimulus and new regional trade initiatives will need to lend a hand1 Economics Global Q4 2019 Putting the air back in Global growth has now slowed to the slowest pace since the eurozone crisis and ongoing trade tensions and other geopolitical uncertainties leave it poised to slow further. With inflation also still too low, policymakers are trying to put the air back into the global economy. More central banks around the world, led by the Fed and the ECB, are cutting rates. Fiscal stimulus is imminent too but yield curves still seem to be signalling recession. Even if policy succeeds in preventing one, will this stimulus raise productivity growth, wages and the neutral interest rate? Or will it instead pump up new asset bubbles and have distributional consequences that pave the way to more populism and an ongoing reversal of globalisation? How much of a counterweight can be provided by new trade deals being struck by economies in Asia-Pacific and Europe? Gauging vulnerabilities The long-awaited turnaround in the global manufacturing sector has not yet materialised. Markets have revived a little on news that talks between the US and China will resume in October but we still expect trade frictions to continue to weigh on growth. Capital spending plans cannot be put into action and cancelled as quickly as financial markets respond to the latest encouraging news of a trade truce or sign of further tension. So although there have been a few glimmers of hope that the worst of the industrial recession may be behind us, the most recent European flash PMIs were very weak and the outlook for investment spending is soggy. Evidence of the industrial recession feeding through to the more resilient services sector and labour markets has so far been scant but there have been some potential warning signs, most notably in the expectations component of the eurozone service sector PMIs and a gradual rise in the number of unemployed in Germany in the four months to August. The rise in household saving rates in many advanced economies may be a red flag too and in some industrially exposed Asian economies consumer confidence has been sliding. To gauge the relative sensitivities of the advanced and emerging economies we cover we have scanned them for the scale and duration of the industrial downturn as well as their exposure to manufacturing and exports. We have also assessed their ability to deliver further monetary and fiscal stimulus if their economies continue to weaken. The monetary gas is back Acutely aware that their ability to respond to the slowdown in global growth and lower-than-desired inflation is more constrained in the face of this downswing than the last, central banks around the world continue to respond by easing monetary policy. The prescription has not been uniform though. In the advanced world, the Fed clearly has more scope to ease than most. Having already cut by 50bps in Q3, we expect one more 25 bps reduction by end-year. The ECBs well-flagged package of a lower deposit rate, open-ended QE and more forward guidance was duly delivered in September while China also stepped up its monetary easing as the economy slowed further over the summer but in a more selective way than in the past. Reserve requirements and some lending rates have been lowered but there is caution about further inflating the housing market and perhaps a desire to keep some policy powder dry should this prove to be a more prolonged trade dispute. Other emerging economies have followed suit or even led, including some that are still paying lip service to financial stability risks: growth risks are now tipping the balance. Executive Summary Economics Global Q4 2019 2 The key question now is the extent to which monetary easing can prevent a further slowdown or even recession? The yield curve is certainly reflecting nervousness that there is little monetary easing can do to offset the trade-related uncertainty that is dragging down investment and exports. Even if interest rates fall to new even lower levels, investment will not revive as long as future trading relations and supply chains remain in doubt, bearing in mind that it is not just China that is on the US presidents list for further tariff increases: the EU is acutely aware that the deadline for autos tariffs will be reached in mid-November. Consequently, rather than rate cuts reviving investment, corporate sector savings might just continue to rise and productivity growth remain weak. but could be more effective with fiscal too Central banks, particularly the ECB, have become increasingly vocal that they are very close to reaching the limits of what monetary policy can do to address this slowdown and low inflation and that there is a greater role for fiscal policy. We expect that fiscal loosening in 2020 will ultimately be larger than official forecasts currently suggest. Even in the short term, fiscal stimulus can certainly have “fairer” distributional consequences than unconventional monetary policy if, for instance, it raises real wage growth, rather than raising asset prices. Recent analysis by the OECD also reached the conclusion that combined monetary and fiscal policies were not only much more supportive for GDP growth than QE alone but are also much less likely to create asset bubbles. But when central bankers call for a greater role for governments to help them meet their inflation objectives, they are not just talking about a specific need for fiscal stimulus to support near-term demand (which it will need to do). They are calling for fiscal and other policies designed to raise investment and improve human capital in order to drive stronger productivity and wage growth. Only that would raise the natural or equilibrium interest rate (r*) over time. Otherwise, rather than raising potential growth, fiscal stimulus could simply lead to higher budget deficits and debt-to-GDP ratios and risk the re-emergence of debt-sustainability concerns. Trade liberalisation is not finished We cannot rule out the risk that the monetary easing already being delivered or which could potentially be delivered should a recession finally unfold will pump up new asset bubbles and have distributional consequences that pave the way to more populism and an ongoing reversal of globalisation. More may resort to tighter trade and immigration restrictions. To end on a more optimistic note though, it is important to bear in mind that trade liberalisation continues to advance at scale and pace maybe not globally but within and between key regions of the world. As discussed in Trade Turbulence, August 2019, Asia-Pacific and European economies have generally been most engaged in striking, or working towards concluding, comprehensive trade deals. Notable examples led by Asia include the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which is already in effect for seven members, and the Regional Comprehensive Economic Partnership (RCEP) and could be concluded in principle this year. Meanwhile the EU is expanding its market reach by striking free trade agreements with partners further afield, including Japan and Canada, while ratification is pending on deals with Singapore and Vietnam. Hence we conclude with the important point that while trade tensions are creating big risks for the global economy, they continue to accelerate changes in global economic linkages. For example, as Chinas trade with the US has gone into reverse, new markets for Chinese demand are appearing: the share of mainland Chinas exports that go to ASEAN, India and Latin America overtook the share that go to the US this year. 3 Economics Global Q4 2019 Where does this leave our forecasts? Largely because of Germany, which already seems to be in technical recession, we have made a 0.4ppt downward revision to our Eurozone growth forecast for 2020 (see European Economics Quarterly: Stuck, 25 September 2019). This could go lower still should the UK leave the EU with no deal, whether that is on 31 October or after yet another extension. In Latin America, both Mexico and, unsurprisingly, Argentina are also forecast to be hardest hit with some of the least scope for policy manoeuvre to offset their domestic woes. Our US forecast of a further slowdown to 1.7% in 2020 is unchanged, as is our China forecast, which we revised down to 5.8% with the delivery of the latest round of US trade tariffs at the start of September. Cyclically, there are some markets where growth is set to be a little more resilient: those that are less trade dependent, those less reliant on manufacturing or able to benefit from shifting supply chains and those with most policy flexibility. Most of these relative outperformers are in the emerging world. In Asia, the likes of the Philippines and Indonesia should even see slightly stronger growth in 2020 after a relatively depressed 2018-19 when growth was hindered by a combination of being forced to raise rates as the Fed tightened and lower public investment due to fiscal constraints and efforts to rein in external deficits. Those markets with better growth prospects over the coming year all have a degree of both monetary and fiscal stimulus playing a role. But, even with all of this stimulus, global growth at 2.5% (lowered from 2.7% last quarter) will still be as weak as the post-crisis low delivered during the eurozone crisis in 2012 and inflation is set to remain stubbornly low. Key forecasts % Year _ GDP _ _ Inflation _ _ 2019f _ _ 2020f _ 2021f _ 2019f _ _ 2020f _ 2021f World 2.6 (2.7) 2.5 (2.7) 2.6 3.0 (3.1) 3.0 (2.9) 2.7 Developed 1.6 (1.6) 1.2 (1.3) 1.4 1.5 (1.4) 1.6 (1.7) 1.6 Emerging 4.0 (4.3) 4.3 (4.6) 4.3 4.1 (4.2) 3.9 (3.8) 3.4 US 2.3 (2.4) 1.7 (1.7) 1.6 1.8 (1.7) 2.1 (2.0) 2.1 Mainland China 6.2 (6.5) 5.8 (6.3) 5.8 2.6 (2.5) 2.4 (2.3) 1.9 Japan 0.9 (0.7) -0.1 (-0.2) 0.7 0.7 (0.6) 0.9 (1.1) 0.1 India* 5.9 (6.8) 6.5 (6.8) 6.5 3.5 (3.5) 3.7 (4.0) 3.8 Eurozone 1.0 (1.0) 0.7 (1.1) 1.0 1.2 (1.2) 1.2 (1.4) 1.4 UK 1.1 (1.2) 1.0 (1.1) 1.4 1.9 (1.8) 1.9 (1.7) 2.0 Russia 1.0 (1.3) 1.7 (1.9) 2.1 4.6 (4.7) 3.7 (3.9) 4.0 Brazil 1.0 (1.0) 2.1 (2.1) 2.3 4.0 (4.3) 4.2 (4.2) 3.9 Source: HSBC estimates. Note: *India data in fiscal year (2019 = April 2019 to March 2020), but calendar year figure is included in aggregates. GDP aggregates use chain nominal GDP (USD) weights and Inflation aggregates calculated using GDP PPP (USD) weights. Parenthesis show forecasts from the Global Economics Quarterly Q3 2019, but under our revised global GDP weights, chain-weighted from 2018, and so do not match the previously published forecasts. We have also, for the first time, published our initial projections for 2021. The forecasts of most central banks and multilateral institutions have a tendency to assume time heals all wounds -that, two years out, economies will move towards trend rates of GDP growth and inflation back towards central bank targets. We do not share that view. Our 2021 forecasts are best described as more of the same, with our global growth projection very similar to the expected outturn for 2019-2020. New weightings for our global aggregate forecasts We have updated the weights within our global aggregates to chain weight from 2018. This has resulted in higher EM and global growth rates, largely due to increased weights for both China and India. These weights will give a lower weighting to large EMs than PPP weights which are used by many international organisations. We have also included all of the markets covered by our economists in these global aggregates, not just those highlighted in this Global Economics publications. Smaller markets can be found in the regional quarterlies. The comparison figures shown in brackets use the Q3 2019 country/territory forecasts but restated using the new weights, which will in future be updated every September. Economics Global Q4 2019 4 Key forecasts 5 Putting the air back in 6 Still on the way down 6 Cracks emerging? 8 Gauging vulnerabilities 10 The monetary gas is being pumped back in 11 Will it work? 12 Time to get fiscal 15 Better together 16 Goldilocks, recession and populism 19 De-globalisation continues but so does trade liberalisation 21 Global economic forecasts 25 North America 42 US 42 Canada 44 Asia Pacific 46 Mainland China 46 Japan 48 India 50 Australia 52 South Korea 54 Indonesia 56 Taiwan 58 Thailand 60 Malaysia 62 Singapore 64 Hong Kong 66 Philippines 68 New Zealand 70 Eurozone 72 Eurozone 72 Germany 74 France 76 Italy 78 Spain 80 Other Western Europe 82 UK 82 Switzerland 84 Sweden 86 Norway 88 CEEMEA 90 Poland 90 Russia 92 Turkey 94 Saudi Arabia 96 South Africa 98 Latin America 100 Brazil 100 Mexico 102 Argentina 104 Colombia 106 Chile 108 Disclosure appendix 110 Disclaimer 112 Contents 5 Economics Global Q4 2019 Key forecasts _ GDP _ _ Inflation _ 2019f 2020f 2021f 2019f 2020f 2021f World (nominal GDP weights) 2.6 2.5 2.6 3.0 3.0 2.7 Developed 1.6 1.2 1.4 1.5 1.6 1.6 Emerging 4.0 4.3 4.3 4.1 3.9 3.4 North America 2.2 1.7 1.6 1.8 2.0 2.1 US 2.3 1.7 1.6 1.8 2.1 2.1 Canada 1.5 1.4 1.5 1.9 1.6 1.8 Asia-Pacific 4.3 4.2 4.4 2.4 2.4 2.2 Asia Big Three 4.9 4.6 4.8 2.6 2.6 2.2 Mainland China 6.2 5.8 5.8 2.6 2.4 1.9 Japan 0.9 -0.1 0.7 0.7 0.9 0.1 India* 5.9 6.5 6.5 3.5 3.7 3.8 Asia ex Big Three 2.7 2.9 3.1 1.7 2.0 2.1 Australia 1.9 2.3 2.7 1.6 1.8 2.1 South Korea 2.0 2.2 2.2 0.5 1.6 1.5 Indonesia 5.0 5.0 5.2 3.2 3.2 3.3 Taiwan 2.1 1.9 2.0 0.5 0.7 0.8 Thailand 3.1 2.8 2.9 0.9 1.1 1.0 Malaysia 4.5 4.1 4.3 0.6 1.6 1.9 Singapore 0.4 0.9 1.6 0.6 0.7 0.7 Hong Kong 0.3 1.5 1.4 2.8 2.5 2.3 Philippines 5.7 6.3 6.3 2.7 3.0 2.9 New Zealand 2.1 2.4 2.3 1.5 1.9 1.9 Western Europe 1.1 0.8 1.1 1.4 1.4 1.5 Eurozone 1.0 0.7 1.0 1.2 1.2 1.4 Germany 0.4 0.3 0.9 1.5 1.6 1.5 France 1.3 1.0 1.2 1.4 1.6 1.3 Italy 0.1 0.4 0.6 0.8 1.0 1.0 Spain 2.2 1.8 1.6 0.9 1.5 1.7 Other Western Europe 1.2 1.1 1.4 1.7 1.7 1.8 UK 1.1 1.0 1.4 1.9 1.9 2.0 Norway* 2.1 1.3 1.4 2.2 2.1 2.3 Sweden 1.2 1.3 1.5 1.8 1.6 1.6 Switzerland 0.9 1.1 1.0 0.7 0.9 0.8 CEEMEA 1.1 1.9 2.3 5.9 5.8 5.4 Poland 4.2 4.0 3.4 2.4 3.2 2.7 Russia 1.0 1.7 2.1 4.6 3.7 4.0 Turkey -1.1 1.0 2.1 16.1 14.7 12.0 Saudi Arabia 1.4 1.9 2.4 -1.1 2.2 2.5 South Africa 0.6 1.0 1.0 4.3 5.1 4.9 Latin America