December 20, 2019 / 12:16 AM / in 2 months

Global outlook sombre for late-cycle expansion despite market joy - Reuters poll

BENGALURU (Reuters) - Most major economies have likely averted recession for now but growth will remain subdued in 2020, according to Reuters polls, despite the recent round of central bank stimulus and signs of a preliminary truce in the U.S.-China trade war.

Several big central banks have cut interest rates this year, responding to a slowdown that few policymakers had expected around this time in 2018. That loss of momentum in the global economy was driven in part by a crunch in world trade.

But with rates still low in developed economies, and with many emerging economies snagged in the slowdown, further impetus for global growth will need to come from elsewhere.

That will have implications for financial markets, which had a banner year in 2019, with Wall Street near a record and other equity markets flying high on was is only a slightly-improved economic backdrop and tentative steps on trade.

While a few economies, notably the United States, have stabilised very late in one of the longest expansionary periods on record, a vigorous snapback to above-trend performance is not likely, according to predictions from hundreds of forecasters polled by Reuters in recent weeks.

“Despite unprecedented action from the world’s central banks, global growth and inflation remain subdued more than 10 years after the Great Recession,” noted Joseph Quinlan, chief investment officer for market strategy at BofA global research.

“Meaningful reflation and inflation remains elusive, creating fears among investors that central banks are ‘pushing on a string.’”

A modest U.S. economic growth outlook has barely budged following three interest rate cuts from the Federal Reserve this year, and even with economists now reasonably confident an initial Washington-Beijing trade deal will be signed. [ECILT/US]

The chances of an outright recession in major economies have receded since the middle of the year, when they jumped to highs not seen in Reuters polls since the financial crisis. That is partly down to the latest round of global rate cuts.

But in India, for example, where the Reserve Bank of India has slashed interest rates five times in succession by 135 basis points to 5.15%, making it the most aggressive major central bank in the world in 2019, growth is still slowing and the property market is in the doldrums. [RBI/INT] [IN/HOMES]

And the round of global easing is nearing an end.

Sweden’s central bank on Thursday ended five years of negative rates by raising its benchmark repo rate by a quarter point to zero, as expected. But the Riksbank also indicated that it expected to keep rates unchanged through 2021.

Bank of Japan Governor Haruhiko Kuroda signalled his resolve to keep the money spigot wide open, but suggested that no immediate expansion of stimulus was forthcoming.

Other major central banks were also forecast to stay on the sidelines in 2020, according to economists in Reuters polls.

For a graphic on Reuters Polls: Interest rate and markets outlook:

here

There is a growing sense among analysts polled this year that central banks not only have lost their ability to lift inflation, which still remains tame, but also may be losing their post-crisis powers to drive up asset prices.

While the rise in financial assets has handily outpaced underlying economic performance, that disconnect may end next year, according to currency strategists, equity analysts, fixed-income strategists and global fund managers in Reuters polls.

“2019 has turned out to be that rarity: a spectacular year for both equity and fixed-income returns. By any yardstick, financial markets have put in a very creditable performance for 2019. It is one that will be hard to repeat in 2020,” said Ajay Rajadhyaksha, head of macro research at Barclays.

Most stock indexes covered by Reuters in the latest global poll were forecast to make single-digit gains in 2020. Major government bond yields, meanwhile, were not expected to rebound from their latest lows. [EPOLL/WRAP] [US/INT]

“Looking ahead, monetary policy largesse over the past decade increases the risks of a disorderly rise in bond yields, and could also amplify a policy mistake and/or increase the risks of monetary policy impotence,” noted BofA’s Quinlan.

“Higher debt levels have failed to deliver stronger growth,” he added.

Even global property prices, with a few notable exceptions, have put in a dull or no response to the latest round of central bank easing. Housing market experts are not optimistic about any kind of major rebound in the coming year.

And in the foreign exchange market, the U.S. dollar’s reign was forecast to continue despite diminishing returns from the most overcrowded trade of 2019. [EUR/POLL]

“The dollar has been persistently strong. Even this year it has continued to eke out a small gain despite the fact that the Fed has cut rates on three occasions. So, even at these lower U.S. yields the dollar looks relatively attractive,” said Lee Hardman, currency strategist at MUFG.

Additional reporting and analysis by Vivek Mishra and Rahul Karunakar; Graphics by Vivek Mishra; Editing by Ross Finley and Nick Zieminski

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