Since peaking at 3.8% in 2017, economic growth outside of the U.S. has been decelerating, reaching 2.7% in the second quarter of 2019. Manufacturing has led the way down, especially in big export powerhouses in Europe and Asia. While each region has its own set of domestic uncertainties, there have been two overarching geopolitical uncertainties weighing on exports and capital spending: the continued escalation of trade tensions and the rising possibility of a “no deal” Brexit. Over the past six weeks, the intensity of both these risks has decreased, as pathways have emerged for a truce in the trade war between the U.S. and China and an orderly departure of the UK from Europe. This has led investors to wonder: will the global economy improve in 2020?
We cautiously expect that the trade war will not escalate further and that the Brexit process will not include a departure without a deal in place. These assumptions, combined with the broad monetary easing and more limited fiscal stimulus seen throughout 2019, should allow global growth to stabilize and even shift slightly higher toward its trend of 3.0% in 2020. In fact, we have started to see early signs this bottoming could occur early next year. Leading indicators have begun to improve in October and November, including: export orders in Korea and Taiwan and Markit manufacturing PMI future output expectations and new orders. Importantly, new orders have been improving faster than inventories in emerging markets and the Eurozone, which suggests that output should pick up over the next few months.
With that said, investors should not expect a 2017-style reacceleration in global growth given that the lingering trade clouds will limit the extent of the improvement in global exports and capex. In addition, employment growth has slowed a bit in developed markets over the past few months, causing a cooling in service sectors. As a result, we expect only a mild improvement in growth outside of the U.S., but this is already a victory after steady deceleration.
This greater economic stability should bolster international earnings expectations, halting the decline seen over the past 18 months. Earnings should, therefore, be a neutral-to-positive factor for international equity performance. In addition, multiples may expand a bit further, should the expected trade war truce continue to result in higher investor confidence. Lastly, this improvement in confidence could allow the dollar to stabilize if not fall next year. All told, international equities should move higher in 2020, with occasional pockets of volatility along the way. U.S. outperformance again next year is not such an obvious call – investors should ensure they have sufficient international equity exposure for 2020 and beyond.
New orders improving faster than inventories suggests manufacturing might improve soon
Manufacturing PMI, ratio of new orders vs. inventories
Source: Markit, J.P. Morgan Asset Management. Data are as of November 22, 2019.