Consumers carry the global economy

8 January 2020

Consumer spending growth has supported many economies over the past year at a time when industry, exports and investment have been underpowered.

Global growth in 2020–21 will still hinge greatly on prospects for personal expenditure as investment spending will remain constrained.

On the manufacturing side there are finally signs that the electronics and automotive sectors, which played such a big role in the 2019 industrial recession, have bottomed out. But the outlook is mixed. While the 5G roll-out should boost the electronics sector, the car industry is only likely to become less of a drag on production rather than drive a strong revival.

Monetary easing is starting to have an impact in some countries, with US residential investment rising in late 2019 for the first time since the financial crisis. More interest rate cuts are expected in parts of the emerging world. Fiscal policy is also being eased. Japan has joined the economies promising fiscal stimulus and more could be on the way in China, too.

Consumer spending growth should be only slightly weaker in 2020 than in 2019 globally. Even with employment growth slowing, unemployment rates should stay low.

However, resilient consumer spending in the largest and most consumer-driven markets cannot be relied on to lift growth in the export-led economies. Not only is consumer spending less import-intensive than investment growth, ageing Western populations and higher earnings in the emerging world mean a growing share of household income is spent on services.

Global growth will hinge on personal expenditure

US consumers are spending more on domestically provided experiences – and more on healthcare. Meanwhile, Chinese consumers now spend almost as much on housing costs (24 per cent of their outgoings) as they do on food (27 per cent).

In theory a consumer-led expansion, particularly with very low unemployment, is more likely to lead to inflation than investment-driven growth. But the past two decades have illustrated that many factors can keep inflation stubbornly low.

We’ve seen ‘good deflation’, reflecting a positive supply shock from the global labour market and technological advances that have lowered prices for services as well as goods. And we have seen ‘bad deflation’ arising from weak demand as economies seek to reduce their levels of debt. But we now also have ‘bad inflation’ caused by trade tariffs and, in some countries, high food prices. This squeeze on real incomes could curb consumer spending growth.

Given that expectations on prices are still low and wage growth may have peaked, our weak GDP growth forecasts point to stable (if still subdued) inflation. So, with the current signs of stabilisation in growth and buoyant financial markets, many central banks – including the US Federal Reserve and the European Central Bank – may not need to deliver further easing in 2020. Other G10 central banks, including those in Australia, Canada, New Zealand and the UK, could cut once more.

Our global growth projections have been gradually lowered since mid-2018 but we are now holding our 2020 forecast steady at a decidedly mediocre 2.5 per cent, with 2.6 per cent for 2021. We expect 1.7 per cent US growth in 2020 followed by 1.6 per cent in 2021, with mainland China’s growth down to 5.8 per cent for both years.

Avoiding global recession would be a relief in the near term but such growth rates are not strong enough to significantly raise inflation: 2020 will see a continued muddle-through for the global economy while debt burdens increase.

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Analyst certification

The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Janet Henry

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