Global Economic Outlook: Mild Recession or Weak Recovery
As the new year approaches there are many concerns about the prospects for the global economy after a difficult year. There has been no obvious bright spot in the global economic performance. Instead，there have been several lingering questions about what lies ahead. Among them，is a global recession around the corner? How will negative interest rates affect the monetary policies of major central banks? How will Brexit and the Sino-US trade war play out? Will the major world economies reach a basic consensus to maintain broad stability and gradual improvement in global governance when globalization is being seriously challenged? And will these already complex issues become even harder to deal with in the coming year?
At a roundtable discussion organized by China Forex，Lin Caiyi，chief economist of HuaAn Funds，and Zhong Zhengsheng，chairman and chief economist of CEBM，Caixin Insight，shared their opinions on the prospects for the global economy. The conversation，which follows in edited form，was moderated by Zhong Wei，China Forex deputy editor.
Zhong Wei: Welcome to this roundtable discussion. In late 2018 and early 2019，major international institutions were gloomy about the prospects for future economic developments. Experts believed that under the influence of recession and mounting inflation global economic growth would be disappointing. Major central banks would be pushed to resume quantitative easing and begin another cycle of interest rate cuts. With the passing of time，however，some institutions have revised their expectations. The IMF，for instance，now expects that economic growth in both the developed and developing countries will be slightly better next year than in 2019. In your opinion，what new factors have contributed to this cautiously optimistic outlook?
Lin Caiyi: There are three major factors that account for the improved outlook. First，the impact of trade disputes provoked by the United States has gradually been absorbed as far as the real economy and market expectations are concerned. Second，the deflator for core personal consumption expenditure (PCE) has continued to rise and China’s PMI and CPI have been on an upward trend. The prosperity index and corporate profit data are starting to reflect the positive results of an improved business environment due to cuts in taxes and administrative fees. Additionally，the US Federal Reserve’s expansion of its balance sheet in the fourth quarter of 2019，along with China’s easier credit policies，all point to economic improvement in 2020.
Zhong Zhengsheng: The cautiously optimistic expectations for global economic growth are the result of the following factors: First，global monetary policy has been relaxed further. The Fed has cut interest rates three times in this cycle and the European Central Bank，at its September meeting，cut its deposit interest rate by 10 basis points to -0.50%. The ECB also resumed its asset purchase program. Monetary growth in the US and Europe is stabilizing and China’s social financing has seen steadier growth since the first quarter of the year. Expectations for more financial stimulus have also intensified.
Japan has already launched fiscal stimulus programs while there are further efforts for stimulus in Germany，the locomotive of the European economy. And China’s large-scale tax and administrative fee cut also has begun to show positive results. The service sector is relatively stable. Since the beginning of 2019，global manufacturing encountered a significant setback as the PMI of all major economies dropped below 50，the level showing economic contraction，even though the service sector held steady. Structural changes within the service industry itself might be the major contributing factor for this result. Meanwhile，services related to manufacturing still had rapid growth. And Sino-US friction is expected to ease as the two sides say they are about to agree on a phased trade deal. More frictions are not likely to emerge until at least the US presidential election is held next year.
Zhong Wei: Early implementation of macro-controls enabled a smooth start for China’s economy in 2019，though economic growth still lost momentum over the first three quarters of the year. Counter-cyclical policies gradually took effect，and expectations for growth in the fourth quarter improved. China’s economy has encountered new challenges this year，such as the impact of pork prices on the consumer price index as well as a decline in auto sales，as well as volatility in Sino-US trade relations. What are your expectations for China’s economy in 2020?
Lin Caiyi: From the perspective of overall development trends，the upgrading of consumption is the core driving force of China’s economy. The real estate sector is not likely to see much of an upturn and auto demand has also stagnated. In first and second tier cities，demand for autos has been constrained by traffic bottlenecks. Moreover，consumption data suggest that the growth in demand for education，health care，entertainment，as well as leisure and other services is likely to be much faster than demand for clothing and food.
Interest rate reforms such as the implementation of the benchmark lending rate – the loan prime rate – have helped make rates more market-based. Since August，corporate lending，especially medium and long-term loans，have increased at a quickened pace. In September，the growth of the overall stock of enterprise financing rose 7.6% from 7.1% previously and M2 realized a year-on-year increase of 8.4%，benefiting from an increased supply of credit. Fiscal support for the economy expanded and as a result fiscal deposits fell more than 700 billion yuan in September from a year earlier，doubling the year-on-year decline recorded a year ago.
As for businesses，the indexes for enterprise profits and overall business conditions began to respond positively to tax cuts enacted in the second quarter. Aided by easier credit policies，most enterprises will have better operating conditions by the end of 2019.
In sum，economic growth in 2020 will continue to trend moderately lower，but there will be a number of areas where support for the economy will be apparent.
Zhong Zhengsheng: China’s quarterly GDP growth rate could slip below 6% in 2020，but that is no cause for alarm. Let’s look at it from the perspective of the economic cycle. Currently，inventories of finished goods at enterprises above a designated size are only 2.2%，which is already quite close to the historical low of 1.9%. Added value growth in most industries is below one-third of the historical average and room for further production cutbacks is limited.
China’s efforts to upgrade its economy have been accelerated by a steadily rising role of the service sector coupled with greater industrial concentration. In recent years，emerging services such as big data and the “Internet of Things” have had significant positive spillover effects on productivity. From a policy level，compared with major Western countries，China’s monetary and fiscal policy space is sufficient and closer to“normal” levels. Making appropriate use of this at the right time will help ensure a healthy economic performance.
Additionally，with the introduction of support systems and measures to improve market access，a new round of reform dividends can be expected. One area where this is expected is the capital markets. With the decline in the annual fixed deposit rates in developed economies，returns on renminbi assets will be comparatively more attractive. Foreign purchases of renminbi assets will gather pace. All of these factors will lay a sound foundation for the recovery and development of the real economy.
Zhong Wei: In 2019，concerns over growth and inflation drove a worldwide trend towards negative interest rates. Major central banks also resumed quantitative easing policies. The renminbi exchange rate weakened to more than 7 yuan to the US dollar this year. Moreover，even though the US Fed has denied it has begun another round of rate cutting，it has resumed purchases of short-term US Treasuries，or what has been referred to as QE 4.0. T