Macro Factors and Their Impact on Monetary Policy, the Economy, and Financial Markets

Global Economy Tipping Toward Recession

As discussed in the January issue of Macro Tides entitled ‘Markets Are Priced for Perfection, Not Disappointment’, coming into 2020 expectations for an acceleration of growth in the global economy and in the U.S. were high. “The U.S. stock market ended 2019 with a record run based on a Phase One trade deal with China, institutional Fear Of Missing Out (FOMO), projections by the Federal Reserve that interest rates will not change in 2020, and expectations the U.S. and global economy will strengthen in 2020. This expectation is critical since S&P 500 earnings were basically flat in 2019, so the entire gain in the S&P 500 in 2019 was due to a 30% expansion in its Price Earnings ratio.” I thought expectations for a quick pickup in growth in the first quarter were too optimistic, and explained why in the February issue entitled ‘Global Economy Stabilizing But Signs of a Rebound Are Weak.’ “The balance of recent data for the global economy and the U.S. indicate that both have stabilized, so the widespread slowing in growth in 2019 has been arrested. However, indications that a true acceleration is taking hold are not yet present.” I noted that the IMF had once again downgraded its forecast for global GDP for 2020 and 2021. It was the sixth straight reduction, even though the IMF expected global GDP to post a modest rebound from 2.9% to 3.3% in 2020. Despite the modest improvement, the IMF acknowledged that "there are now tentative signs that global growth may be stabilizing, though at subdued levels", and admitted that "few signs of turning points are yet visible in global macroeconomic data."

I also noted that global trade had contracted in 2019 for the first time since the financial crisis and for only the second time since 1990. Although the trade deal between the U.S. and China removed the risk of a further escalation, a 25% tariff on $250 billion in Chinese imports and a 7.5% tariff on another $120 billion of imports remained in place. The Congressional Budget Office has estimated that the existing tariffs would lower the level of real GDP by 0.5 percent in 2020, raise consumer prices by 0.4 percent, and continue to weigh on profit margins of the U.S. companies involved.

The expectations for a speedy recovery in the first quarter were predicated on a rebound in manufacturing and business investment. However, a Deloitte CFO survey of 147 CFO’s of companies with at least $3 billion in annual sales in Canada, Mexico, and the United States found that the percent of CFO’s planning to increase hiring had dropped from 63% in early 2019 to 54%, and only 49% expected to increase business investment in 2020 compared to 73% in 2019. This suggested that after an extended period of slowing growth, the majority of businesses would adopt a ‘Show Me’ attitude before deciding to further increase business spending. The reluctance to increase business investment had also been confirmed by the dramatic slowing in Commercial and Industrial loans during 2019.