Just as geopolitical headwinds eased in late January with a phase-one U.S./China trade deal and the U.K. formally leaving the European Union, worries about the Chinese coronavirus outbreak surged and the growing optimism on global growth dampened.
On the positive side, low inflation allowed the U.S. Federal Reserve and the European Central Bank to cut interest rates and provide monetary stimulus in 2019. This is still rippling through the global economy and boosting growth.
In the U.S., consumers are confident and the manufacturing downturn has eased, but overall growth is being held back by relatively low levels of business investment, largely due to lingering trade uncertainty. A rebound in capex may not occur until after the U.S. presidential election in November. CBRE forecasts U.S. GDP growth of around 2% in 2020, enough to generate moderate employment gains.
Despite a recent drop in core CPI inflation, real interest rates in the U.S. remain negative (Figure 1). This is good for real estate, although it is perplexing in a broader economic context. The Fed has put a hold on further policy rate reductions but has room to cut further if needed. Open-market operations have resumed. Fiscal policy will be neutral for growth in 2020 as the impact of earlier tax cuts eases. Further tax cuts are likely in 2021 if President Trump is reelected.
Figure 1: The U.S. Real Interest Rate Remains Negative
Source: Bureau of Labor Statistics, Federal Reserve, CBRE Research, January 2020.
Manufacturing activity has stabilized in the U.S., including auto production that had declined for four years. Housing construction and sales are picking up with low mortgage rates and accelerating wage growth (Figure 2).
Figure 2: Housing and Auto Activities Pick Up
Source: Census Bureau, BEA, Macrobond, CBRE Research, January 2020.
Europe continues to fend off recession risks. Growth slowed further in the Euro Area during the fourth quarter of 2019, attributed to strikes in France and political volatility in Italy. Nevertheless, business confidence has been largely restored in the manufacturing sector (Figure 3) as Germany stabilizes with rising manufacturing PMI and strong domestic demand. Based on healthy consumer confidence and employment, Germany’s real GDP growth is expected to exceed 1% in 2020. As some Brexit uncertainty lifts, the U.K. also can expect modest economic recovery in the next few quarters, but full-year growth likely will remain slow as the U.K. and EU work to hash out the terms of their future trade relationship.
Another potential upside lies in pro-growth fiscal policies in Europe, including Germany, where the budget is now in balance. Increased government spending will highly benefit the private sector.
Figure 3: Euro Area Markit Business Confidence Index