Consumption carries the global economy

Weak world growth and low inflation in 2020

15 January 2020 Janet Henry, Global Chief Economist

    Consumer spending growth has supported many world economies over the past year when industry, exports and investment have been underpowered.

    Global growth in 2020-21 will still hinge greatly on prospects for personal expenditure as investment spending will remain constrained, not least because some degree of US-China trade tensions is likely to continue irrespective of who is US president.

    On the manufacturing side, there are finally signs that the electronics and autos sectors that played such a big role in the 2019 industrial recession have bottomed out. But the outlook is mixed. The 5G roll-out should boost the electronics sector while the car industry is only likely to become less of a drag on production rather than drive a strong revival.

    Monetary easing is starting to have an impact in some countries – US residential investment rose in late 2019 for first time since the financial crisis – and more interest rate cuts are expected in parts of the emerging world. Fiscal policy is also being eased. Japan has joined the economies promising fiscal stimulus and more could be on the way in China too.

    Consumer spending growth should be only slightly weaker in 2020 than in 2019 globally. Even with employment growth slowing, unemployment rates should stay low.

    However, resilient consumer spending in the largest and most consumer-driven markets cannot be relied on to lift growth in the export-led economies. Not only is consumer spending less import-intensive than investment growth, ageing Western populations and higher earnings in the emerging world mean a growing share of household income is spent on services.

    US consumers are spending more on domestically-provided experiences – and more on healthcare – while the 24 per cent of Chinese consumers’ outgoings on housing-related items is now approaching the 27 per cent spent on food.

    In theory a consumer-led expansion, particularly with very low unemployment, is more likely to lead to inflation than investment-driven growth, but the past two decades have illustrated that many factors can keep inflation stubbornly low.

    We’ve seen ‘good deflation’, reflecting a positive supply shock from the global labour market and technological advances which have lowered prices for services as well as goods, and ‘bad deflation’ arising from weak demand against a backdrop of a desire to reduce debt. But we now also have ‘bad inflation’ caused by trade tariffs and, in some countries, high food prices. This squeeze on real incomes could curb consumer spending growth.

    Given that expectations on prices are still low and wage growth may have peaked, our weak GDP growth forecasts point to stable (if still subdued) inflation. So, with the current signs of stabilisation in growth and buoyant financial markets, many central banks – including the US Federal Reserve and European Central Bank – may not need to deliver further easing in 2020. Other G10 central banks, including Australia, Canada, New Zealand and the UK could cut once more.

    Global growth projections have been gradually lowered since mid-2018 but we are now holding our 2020 forecast steady at a decidedly mediocre 2.5 per cent with 2.6 per cent for 2021. We expect 1.7 per cent US growth in 2020 followed by 1.6 per cent in 2021, with China’s growth down to 5.8 per cent each year.

    Avoiding recession would be a relief in the near term but such growth rates are not strong enough to significantly raise inflation: 2020 will see a continued muddle-through for the global economy while debt burdens increase.

    Original publication date: 16 December 2019

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