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“Things will get worse before they get better.”
That’s the opening line to UBS ’ over-400-page 2020 global economics and markets outlook, which was published earlier this week. Nearly 40 strategists and economists from the banks’ research division collaborated on the report. Here are their key points and findings:
• The UBS team notes that disruptions to global trade have been the biggest drag on global economic growth over the past two years. It’s caused a drop in industrial production as foreign demand for goods in many countries dried up. It’s also led to a decrease in investment by businesses waiting to see how things shake out.
• But there’s more to the recent industrial and manufacturing weakness than just tariffs and trade. UBS attributes about half of the slowdown in industrial production since late 2017 to a decline in global auto production. Meanwhile, falling oil prices have dented U.S. shale production, which UBS estimates accounts for about a quarter of the global industrial slowdown over that time.
• A whole lot depends on how the U.S.-China trade war progresses next year. In UBS’ base-case scenario, global gross-domestic-product growth decelerates to 3.0% in 2020 from 3.1% in 2019. That’s about half a point below the International Monetary Fund’s forecast, with UBS more pessimistic about the removal of tariffs on U.S. and Chinese goods. UBS expects global equities to rise less than 4% next year, after a 17% rise this year.
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• UBS’ base case is for 2020 GDP growth in the U.S. of 1.1%, but at a slower pace to start the year. They see 0.5% and 0.3% GDP growth rates in the first and second quarters, respectively, followed by 1.7% and 2.0% in the third and fourth quarters. In 2019, UBS sees the U.S. economy growing 2.2%.
• In UBS’ trade-war escalation scenario—where U.S.-China negotiations fall apart and all tariffs go up to 30%—they see global growth coming in at 2.8% and U.S. growth falling to 1.0%. They would expect central banks around the world to continue lowering interest rates and bond yields to keep falling. UBS also sees a 5% drop in global equity markets as concerns about growth outweigh monetary policy support.
• Even in their alternative trade war de-escalation scenario—in which all tariffs are removed—the UBS analysts don’t expect the relief to global growth to be large. They see the world economy increasing an additional 0.2 percentage point over their base case, as business uncertainty lingers and some damage can’t be undone.
“Firms that shut down cannot be re-opened, people who lost their jobs and found new ones lost income for a period of time for which there is no ‘make up’ effect, and we believe businesses that found alternative suppliers won’t necessarily switch back to China,” they write. An end to the trade war would give a boost to stock markets, however, with global equities up 10%, according to UBS’ forecast.
Write to Nicholas Jasinski at nicholas.jasinski@barrons.com