Positioning for the Tide: Global Strategy & Economics Outlook for Q1

Markets 360, the strategy and economics division of BNP Paribas Global Markets, looks at the macro drivers that could reshape the global economy in 2020.


Trade tensions persist

The US and China may have agreed to a ‘phase one’ deal, but Markets 360 thinks trade looks set to be a key theme driving headlines in 2020. Our view is that the next phase will be much more challenging, covering deeper, more structural issues ahead of the US presidential election. As a result, our experts do not foresee a ‘phase two’ agreement and, moreover, we see a risk of US-EU trade frictions ahead. We think there may be disagreement on a range of issues, even if the US administration does not ultimately impose tariffs on the region’s car exports.


At Markets 360, we anticipate that disinflation will persist in the medium term, although we predict there will be a short-term marginal rise in core inflation in the US and Eurozone as a lagged response to the economic cycle. After that, inflation is projected to decelerate later in 2020. However, there is a risk inflationary rises last longer than initially forecast, or are perceived by markets as being more enduring. In such a scenario, this may result in a negative feedback loop in which the reduced scope for a counter-cyclical monetary policy response triggers asset repricing, resulting in potentially significant implications for the real economy. 

Fiscal policy

Markets 360 supports the shift in Europe and elsewhere on the need for fiscal policy to play a greater role as a counter-cyclical tool in an increasingly challenging environment for central banks. In our base case, fiscal expansion is expected to remain moderate although we certainly see scope for upside surprises.

Markets 360 supports the shift in Europe and elsewhere on the need for fiscal policy to play a greater role as a counter-cyclical tool in an increasingly challenging environment for central banks.

The reasons for this vary across different markets. For example, China is pursuing fiscal expansion but the absence of structural reforms is likely to nullify its impact on the real economy. While the US will probably adopt a mildly expansionist fiscal position in 2020, the medium-term outlook largely depends on the presidential election result. Only if there is a unified government will there be material changes, we think.
Growth in Europe continues to be subdued, yet there is a general unwillingness among countries with space to pursue an aggressive fiscal response. In the event of a recession, this could change – but given our forecast of a shallow recovery, we expect little real expansion.
The UK appears to be heading in a different direction, with the new government pledging fiscal stimulus in the form of public investment. Similarly, Japan – having suffered extensive typhoon damage – is expected to launch a fiscal stimulus focused on disaster recovery and infrastructure projects to deal with climate change.
In emerging markets, however, Markets 360 thinks governments will let monetary policy do the heavy lifting, given the limited scope for fiscal expansion. Latin American countries in particular are likely to stick to prudent fiscal stances as they find little room for manoeuvre in their budgets.

Central Bank policy reviews

With the US Federal Reserve scheduled to publish the results of its policy review in the first half of 2020, Markets 360 expects the US central bank to try to give itself some manoeuvring room and therefore avoid outright targeting of average inflation. Meanwhile, the European Central Bank (ECB) has yet to confirm the timing and remit of its own policy review, although conversations are underway about its scope. We think the exact wording of the inflation objective will be under discussion, as well as other outstanding issues such as negative interest rates, asset purchases and the ECB’s balance sheet more generally.

Climate change

Ignoring the risks of climate change will increase the medium to long-term probability of extreme weather related events, adversely impacting overall financial stability and growth, especially in energy, construction, transport, tourism and agriculture. Even short-term shocks could negatively impact both the economy and markets.
Attempts to tackle climate change might bring about some short-term costs: for example, changes in car emission standards and the shift by consumers towards electric vehicles could pose challenges for Germany’s automobile industry, leading to a drag on the country’s wider economic growth.
Nevertheless, the transition to a low-carbon economy/renewable energy sources will provide an important stimulus for investment. It may also support the call for fiscal policy to play a more decisive role as a counter-cyclical tool through greater investment in infrastructure.

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