U.S. economic leadership is expected to continue this year, despite a sharp slowdown relative to Europe, and other geographies. Aside from previous fiscal stimulus which has persisted, much of this is on account of a resilient consumer in the U.S., as well as positive contribution from housing markets, even amid a weak capex and export environment. One year ago, we were concerned about an imminent recession in the U.S., yet growth in the first two quarters were solid, and continued to surprise to the upside in the second half – even with a slight slowdown. We expect U.S. growth to run above 2%, compared to Europe, where the economy is on track for a little more than 1% as it continues to face headwinds that slow its expansion.
Different political climates, fiscal track records and room for central bank intervention are all reasons why we’re starting to see the decoupling of global growth. Political challenges and populism tensions in Spain, Italy and of course – Britain – have prevented Europe from keeping pace with the U.S.
Meanwhile, in emerging markets (EM), China appears to be experiencing more of a cyclical slowdown, with growth anticipated to hit 6%, or slightly below, in 2020. There is significant debate over the impact Chinese policy stimulus could have in the coming years: our indication is that the effect of the extra fiscal boost will not be substantial, as we expect slower – yet stable – GDP numbers for its domestic economy. The broader concern, however, is that this round of stimulus will not benefit other EM countries to the same extent, so they will be more reliant on a decline in trade tensions between the U.S. and China. Many Southeast Asian economies, for example, are extremely dependent on exports, and could be negatively impacted by a prolonged tariff war. That said, we’re generally bullish on EM broadly, particularly on the debt side, where there is plenty of room to manoeuvre on monetary policy to engineer additional growth, as compared to developed markets where rates are near, or below, zero.