Growth Prospects and Challenges Ahead for the U.S., U.K., Eurozone, China, and Japan

Eurozone

• The eurozone ended the year 2019 on a disappointing note. GDP growth slowed to 0.1% quarter-over-quarter in the final three months of 2019, its slowest pace in six years, amid unexpected contractions in France and Italy. Though leading indicators and surveys are pointing towards a gradual bottoming out, the current coronavirus crisis presents a risk that could derail this stabilization. In light of the disruptions to global supply chains and trade flows from the virus, we expect eurozone GDP growth to remain weak in 2020.
• The common currency region has relatively few cushions to rely on. The European Central Bank is expected to remain on hold, maintaining its accommodative stance amid concerns about the negative side effects of negative interest rates. A much-needed fiscal easing policy faces political hurdles and capacity constraints.

United Kingdom

• With the U.K. formally out of the European Union, attention has turned to efforts aimed at redefining Britain’s economic relationship with the world. New trade terms, customs procedures and regulations are being reconsidered across a broad range of counterparties. Considering the tough work load, we expect the negotiations to drag on beyond 2020, extending the transition period. But the possibility of a no-trade-deal Brexit cannot be ruled out; this would cause sizeable economic pain, a sharp decline in the pound’s value and high inflation.
• The U.K. economy remains in a weak spot. Growth remained flat (on a quarter-over-quarter basis) in the last quarter of 2019, with the services sector slowing and manufacturing in contraction. In our view, weaker economic prospects (consistent with the Bank of England’s recent GDP forecasts) will likely drive the central bank to cut interest rates by 25 basis points in the first half of this year.

Japan

• The Japanese economy continues to struggle, owing to weak domestic demand and troubling external developments. Though recent government stimulus should underpin the economy, the boost will be offset by coronavirus-related trade and supply chain disruptions. In addition, the Japanese tourism sector will suffer due to a large decline in Chinese visitors. Low growth and low inflation imply that the Bank of Japan will likely remain on hold.
• While some sporting events have already been affected by the virus outbreak, the Tokyo 2020 Olympics remain on track. In a worst case scenario, failure to contain the virus would reduce attendance at the Olympics, leading to further downward adjustments to the outlook.

China

• The Chinese economy was already struggling from elevated trade tensions and domestic imbalances before the coronavirus disrupted all sectors. The sharp reduction in economic and social activity has led to massive declines in discretionary consumption and passenger traffic, alongside factory closures. In our base case, we expect the impact to be high but short-lived, with recovery in the second half of the year. But as we discussed recently, a prolonged encounter with the virus could lead to a series of defaults and create financial instability.
• China's government has attempted to counter the economic fallout from the virus. The People's Bank of China cut a key interest rate and injected large amounts of cash into money markets to help take the pressure off banks and borrowers. Tax breaks and subsidies were also announced to help consumers as supply constraints may increase inflation. In a worst case, Beijing may pump money directly into the economy, forsaking its efforts to rein in its debt.

Global Economic Forecast – February 2020

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