America’s days as pace-setter for the world economy may be coming to an end.
With the International Monetary Fund releasing new forecasts on Monday, a rising number of economists are predicting that the U.S.’s momentum will fall behind that of the rest of the world as global growth bottoms out and looks set to slowly pick up in 2020.
“The world leads and the U.S. lags,” Joachim Fels, global economic adviser for Pacific Investment Management Co., which oversees $1.91 trillion in assets, told Bloomberg Television. In one of the more pessimistic forecasts out there, Pimco predicts the U.S. expansion could slow to about 1% in the first half of this year before accelerating.
The projected 2020 pattern would be in contrast to what happened in the past two years, when U.S. demand was boosted by President Donald Trump’s tax cuts while economies elsewhere were weaker and weighed down by his America First trade policies.
“We are turning on its head the story we’ve been telling each other for the last two years, namely that Europe was bad and the U.S. was good,” said Torsten Slok, chief economist for Deutsche Bank AG.
That reversal of fortunes has implications for investors. European stock markets should outperform the U.S. while yields on German bunds should converge upward toward those on U.S. Treasury securities, Slok said.
To be clear, the U.S. economy is still projected to climb faster in 2020 than that of other major industrial countries including Japan and Germany. What’s changing is what JPMorgan Chase & Co. global economist Michael Hanson called “the delta on growth.”
Hanson sees U.S. growth slowing to 1.7% this year from last year’s 2.3%, even as the worldwide expansion holds steady at about 2.5%. He and his colleagues have dubbed the shift “the end of U.S. exceptionalism.”
The switch in the composition of growth is being driven by policy. The stimulus from Trump’s 2017 tax reductions and government spending increases is disappearing just as other economies, particularly in Asia, begin to benefit from their own expansionary steps.
Export-dependent economies such as Germany and Taiwan will gain more than the U.S. if fading fears about an all-out U.S.-China trade war and a Brexit blow up spur a pick-up in international trade.
What’s more, “a cloud of uncertainty will hang heavily over the U.S. economy throughout the year” in the run-up to the November presidential election, said Moody’s Analytics Inc. chief economist Mark Zandi.
“Businesses are going to be focused on what’s going to happen on the other side of the election” and will be inclined to delay spending plans as a result, he said.That could prove to be particularly the case this year given the likely big policy differences between Trump and whomever the Democrats choose to run against him, Zandi added.
There are already some early indications that growth differentials in 2020 will swing away from the U.S. to the rest of the world.The U.S. jobs market ended 2019 on a somewhat softer note, with payrolls and wage growth slowing in December as the unemployment rate held steady at a half-century low of 3.5%.
Troubles at aircraft maker Boeing Co. could trim about half a percentage point from U.S. growth in the first quarter, lowering it to roughly 1.5%, Zandi said.
Asia -- the biggest contributor to world growth -- is showing signs of picking up with key manufacturing gauges stabilizing in the wake of the U.S.-China trade agreement and signs of a bottoming in demand for technology products like semiconductors.
Data released on Friday showed China’s economy displayed greater-than-expected strength in December with investment picking up for the first time since June. South Korea’s semiconductor shipments rose 12% in the first 10 days of January from a year earlier -- the first time the preliminary figure posted growth since October 2018.
Not all economists agree that the U.S. will lag.Goldman Sachs Group Inc. Chief Economist Jan Hatzius argues that the U.S. economy will benefit disproportionately from an easing in financial conditions on the back of interest rate cuts and ebbing trade tensions.
Meantime, Stephen Jen, chief executive officer of Eurizon SLJ Capital, reckons optimism on the Chinese and European economies is overdone. “I don’t agree that the U.S. will under-perform in 2020 and suspect that the market may be a bit too optimistic on the rest of the world,” he wrote in a recent note.
But Pimco’s Fels says global demand in coming months will rely more on the likes of China and Germany than America.
“The U.S. will probably only join in this mild economic recovery in the second half of this year,” he said.
What Bloomberg’s Economists Say...
Optimism about prospects for 2020 growth makes sense. 2019’s monetary easing adds a little momentum. A mini-trade deal has been done. Still, ‘better than expected’ is not the same as ‘good’. A fractional acceleration in global growth won’t reflect outperformance in the U.S. and China - which face a continued if moderate slowdown.
--Chief Economist Tom Orlik
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