Global Economic Trends: Here’s How 2020 Is Shaping Up
Many analysts predict 2020 will have a “Goldilocks” economy. Named after the children’s story, a Goldilocks economy is not too hot (inflation), not too cold (recession), but just right (2-3% economic growth). In the U.S. so far this year, unemployment is low and economic growth is stable. According to International Monetary Fund (IMF), the global economy is projected to grow at a modest rate of 3.3%—not so slow that a recession results and not so fast that inflation becomes a problem. The U.S. economy is expected to grow at a rate of about 2.0% in 2020.
Many variables impact economic performance throughout the year. The factors below must continue to perform ably to maintain these economic projections—any major shifts could slow down economic development or possibly even lead to a recession.
Federal Interest Rate
The central bank’s Federal Open Market Committee met January 29 and voted to keep interest rates at the same level as last year, between 1.5% to 1.75%. In the post-meeting conference, Fed Chair Jerome Powell says, “We wanted to underscore our commitment to 2% not being a ceiling, to inflation running symmetrically around 2% and we’re not satisfied with inflation running below 2%.” The Fed’s decision marked the second consecutive meeting where it made no changes to rates following three consecutive reductions in 2019.
In response to the decision, the U.S. dollar gained in value 0.1% to 97.875 in Asia the day after the decision.
Since interest rates were lowered last year, the door was opened to make refinancing and home-buying more appealing . Banks are less afraid to lend money than they were a decade ago. However, affordable housing is also declining as the cost of homes rises. Another concern is the increase in lending by nonbank lending companies, which are less regulated and could be more vulnerable to failure. If the Fed raises interest rates and the cost of housing continues to increase, the housing market could go into decline, but analysts forecast that won’t happen in the near term and the rates will stay stable in the 4% range.
“The benchmark 30-year fixed rate mortgage will hopscotch back and forth over the 4 percent mark for much of 2020, remaining low enough to facilitate homebuying and providing ample refinancing opportunities on those trips below 4 percent,” says Greg McBride, CFA, Bankrate chief financial analyst.
Higher oil prices can significantly impact the economy by increasing the cost of manufacturing goods. In December, oil prices rose due to political tensions between the U.S. and Iran to $67/b, and further increased to $70 with military activity in Iran by the U.S. This price has since fallen and will average out to $62/b. The U.S. Energy Information Administration expects “crude oil prices will remain elevated in the first few months of 2020, reflecting a price premium on crude oil from recent geopolitical events. However, this price premium will diminish in the first half of 2020, and market fundamentals will drive the crude oil price forecast in the second half of 2020.”
Consumer spending, which is responsible for about 70% of U.S. gross domestic product, has performed well over the last several years. Consumer spending in December through the holiday season was up 3.4% over last year for in-store purchases and up about 18%, setting records, for online purchases.
A hesitation on the part of consumer confidence, however, could foretell failings in other parts of the economy, such as the labor market and business spending. The Conference Board reports that consumers are feeling less optimistic about the economy. "Although consumers' assessment of current conditions improved, their expectations declined, driven primarily by a softening in their short-term outlook regarding jobs and financial prospects," says Lynn Franco, the director of economic indicators at The Conference Board. "While the economy hasn't shown signs of further weakening, there is little to suggest that growth, and in particular consumer spending, will gain momentum in early 2020.”
Other Key Factors
Trade wars, geopolitical tensions, national debts, coronavirus outbreak, and climate change could also impact the global economy. Although two-thirds of Chinese goods coming into the U.S. and over half of U.S. goods exported to China will still be heavily taxed, China has agreed to buy $200 billion worth of U.S .products. The World Bank warns that continued trade wars could raise duties on goods worldwide. Ira Kalish, chief global economist for Deloitte, indicates the U.S.-China trade war could have further negative impact on both economies. “The eurozone economy has already just skirted recession, and specially Germany, where the economy is slowed down to a crawl,” he says. “In large part, that was due to this trade war.”
Geopolitical tensions are not just related to trade wars; rising political tensions and civil unrest impact many countries, especially in the Middle East. Unstable foreign relations leave investors feeling cautious, leading them to keep their money in safer markets, slowing down the economy.
Another concern is the considerable increase in debt for countries with emerging markets and developing economies. High debt diminishes developing a country's ability for long-term growth. “Sound debt management and debt transparency can keep a lid on borrowing costs, enhance debt sustainability, and reduce fiscal risks,” states the World Bank. Strong regulatory and supervisory regimes and good corporate governance are also helpful for using debt productively.
Climate change impacts the economy in large-scale ways. Extreme weather damage is bankrupting farming and other outdoor industries, utility companies, and even entire countries, making them unable to rebuild. Research shows flooding and rising sea levels in the eastern and Gulf states reduced property values in 18 states almost $16 billion from 2005 to 2017. In addition, The Richmond Fed estimated that climate change will reduce U.S. economic growth by 30% over the next century.
Many analysts are concerned about the full effects the coronavirus could have on the global economy, especially if China is forced to take drastic measures to contain the virus. For manufacturing and supply chains, there is optimism that supply flow will not be completely disrupted. "We see no signs as of now that supply chains will be completely disrupted, even if there are delays," says Gerhard Wolf, head of foreign trade at the Association for Wholesale, Foreign Trade and Services (BGA).
Recession Worries Fade
Most professionals in the finance world are not predicting a recession this year. The outlook for the economy in 2020 is hopeful that economic growth will continue, and all the key factors and concerns that could bring negative impacts will stay quiet and stable.
"I expect that the U.S. economy will avoid a recession in 2020," says Robert A. Dye, chief economist at Comerica Bank. However, if a recession does occur, he indicates it will likely have less impact than the last recession that spanned 2007-2009.
Here’s to hoping for Goldilocks!
Some opinions expressed in this article may be those of a contributing author and not necessarily Gray.