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 What to expect in 2020-21: Defending growth at all costs


2019 was marked by record high uncertainty and two recessions, though a broad-based recession was avoided, thanks to swift and sizeable monetary policy reactions. Amid high social tensions, rapidly multiplying political risks and rising climate change risks, 2020 could represent a turning point in policies to defend growth at all costs.

Our top 10 calls for 2020-21:

Global economic growth is likely to remain muted in 2020-21 after bottoming out at the turn of 2019. The trough in global growth is expected in Q4 2019, thanks to the end of trade and industrial recessions. However, global growth is likely to converge towards but remain below +3.0% at the horizon of 2021. In a context of lower growth, global insolvencies are expected to rise by +6% in 2020 compared with +9% in 2019.

U.S.-China trade tensions should not escalate nor de-escalate much further in 2020. The mini-deal is not a game changer but it announces slightly lower uncertainty as a tariff escalation is unlikely in an electoral year. We expect the U.S. average tariff to remain at 7%, compared to 3.5% in 2018. Trade growth will be capped by a lasting trade feud and below potential economic growth (+1.8% in 2020 and +2.5% in 2021).

The U.S. will further explore the road of higher public and corporate debt. A moderate democratic win (55% probability) would raise the level of budgetary risks and reduce the U.S.-originated foreign policy risk. U.S. GDP growth return close to +2% in 2021 due to even more accommodation on the fiscal side.

The global economy cannot rely on a new Chinese bazooka stimulus. We expect China’s GDP growth at +5.9% in 2020 and +5.8% in 2021, after +6.2% in 2019. Such growth rates should still allow the leadership’s goal of doubling 2010’s GDP by 2020 to be met. The policy mix is supportive, but the aim is to manage the slowdown, not reverse it.

The Eurozone economy will grow below its potential rate of +1.4% in 2020-21 as industrial production will only see a gradual recovery. The consumer will continue to save the day, thanks to favorable labor market conditions and robust wage growth. The UK should not be a drag on growth anymore, but difficulties of the German economy, fragile government coalitions in several Eurozone economies, lingering high social discontent and the threat of U.S. import tariffs levied on the car sector remain significant downside risks.

Monetary policy will remain a safety net for growth and markets. The U.S. Federal Reserve will continue the easing of its monetary policy with one rate cut in March 2020 to cope with the recession of the U.S. manufacturing sector and start hiking from H2 2021 (+50bp) only. The European Central Bank is likely to implement another deposit rate cut of 10bp in April 2020 to -0.6%, while maintaining its Quantitative Easing purchases at the pace of EUR20bn until the end of the year. The People’s Bank of China and several central banks in emerging economies will continue to ease their monetary policies in 2020.

High social discontent will persist and call for fiscal policies to be more redistributive. Political stability will be tested across major European countries, while the U.S. Presidential elections will have significant implications in terms of economic and foreign policies. We don’t expect any significant reduction in (geo)-political tensions in the Middle East, while the unrest and political instability in Latin America and Hong Kong could continue in H1 2020. As has been the case for several months, the sharing of value-added will bring more benefit to salaries instead of profits, further eroding margins of companies.

Domestic sectors will outperform. The very expansionary stance of monetary and fiscal policies will primarily benefit domestic demand. Domestic-driven companies (services and construction) will outperform companies relying on foreign revenues and globally integrated supply chains. The automotive sector will continue its muddling through.

Capital markets should remain in a low volatility regime as the dampening effect of unconventional monetary policy prevails. However, the divergence in risk scenario priced into risky assets and safe havens is likely to persist. On the one hand, risky assets, like equities, corporate bonds, emerging markets equities and bonds are not priced for a deterioration of current economic and political conditions. On the other hand, safe-haven assets like sovereign bonds in the developed world are not priced for an improvement of the economic and political environment. In a context of the wait-and-see posture of investors, linked to the U.S. elections and progressive erosion of profits, the global equity market is expected to register an inflexion in its upward (monetary driven) trend. The correlations between the asset classes will remain low, limiting the potential of portfolio diversification.

A -4% depreciation of the Dollar is expected to support Emerging Market assets. Low inflation, a solid safety net provided by expansionary fiscal and monetary policies and an expected depreciation of the USD are likely to nurture risk appetites and lead to an out-performance of emerging assets (equity, bonds and currencies).


Ludovic Subran
Allianz SE
Alexis Garatti
Euler Hermes
Eric Barthalon
Allianz SE