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Staying Fluid Amid Headwinds — 2020 International Financial Market Outlook

In 2019, global financial markets diverged from a slowdown in the real economy, and carried bull markets in both stocks and bonds. Looking forward to 2020, macroeconomic policies of major global economies will become more proactive. Fiscal and monetary policies will become the main driving force behind the stability of economic growth, and will provide more abundant liquidity for financial markets. Liquidity will continue to chase high-quality financial assets, pushing global financial markets against a deceleration of the global economy.

I. Global economic growth still faces multiple uncertainties in 2020

In 2019, IMF lowered global economic growth forecasts five times to 3.0%, a record low since 2009, indicating that Sino-US trade dispute is becoming a systemic risk affecting global economic growth. Fluctuations in geopolitical events as exemplified by Brexit also brought many uncertainties, leading to a further slowdown in global economic growth.

In 2020, the main factors affecting global economic growth may change.

The first is that China and the United States have reached a phase one trade agreement. China has agreed to increase the amount of American manufacturing and agricultural products purchased every year. The United States has also agreed to suspend a new round of tariffs and reduce the tariff rate from the previous round. Even though the two sides have not resolved issues such as intellectual property rights, protection of foreign investment rights, state-owned enterprise subsidies, technology transfer, and the Huawei incident, it is unlikely that the Sino-US trade war will escalate in full, where the United States would impose tariffs on all imports from China and trade disputes become technology and financial disputes. At the same time, reduction of tariff rate by the United States is expected to reduce concerns from enterprises and investors and to help alleviate the downward pressure on foreign trade, investment, and the overall economy.

The second is populism as exemplified by Brexit. On December 12, 2019, the Conservative Party won more than half of parliament seats in UK’s general election. Prime Minister Johnson’s proposal to leave the European Union(EU) is expected to be passed by parliament. The UK will leave the EU under an agreement by the end of January 2020. After a formal Brexit, the UK still needs to renegotiate with the EU on economic and trade relations between the two parties, but it will not leave the EU without an agreement. This will greatly reduce the possibility of a hard Brexit, alleviating uncertainties faced by the global economy.

Third, in 2020, the macroeconomic policy of major global economies will become more proactive, and fiscal and monetary policies will be the main driving force behind the stability of economic growth. In 2019, the Federal Reserve and the European Central Bank both adjusted their monetary policy orientation, with the Federal Reserve cutting interest rates three consecutive times. The European Central Bank announced in September 2019 a new round of easing measures, cutting the deposit rate 10 bps to negative 0.5%, restarting a debt purchase plan of EUR 20 billion per month. It also introduced a two-tier bank reserve requirement system, and did not set a time limit for negative interest rate and bond purchases. On December 12, the European Central Bank announced that its three key policy rates will remain unchanged, in line with market expectations. It is expected that in 2020, the Federal Reserve’s monetary policy will turn to the sidelines with high probability, and the chance of reducing interest rates further is less than 30% in the first half of 2020. The major global economies have gradually shifted from normalizing their monetary policies in the past to finding space to promote easing, which can hedge the downward pressure on the global economy to a certain extent.

Fourth, other factors affecting 2020 global economic growth also include US bipartisan political disputes, US presidential election, rise of populism and geopolitical risks, increasing debt burdens worldwide, and the potential reversal of global monetary easing, etc.

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Content provided by Bank of China (Hong Kong)
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