2020 will be another decent year for the global economy – but it won’t last

One of the reasons equities have remained so solid is due to the feeling that some sort of trade deal with China is secure – but tension will continue into next year and beyond

Though it has been an extraordinary year for politics, it’s a pity economics have been drowned out. For all the noise about political developments, it has been a modestly successful one for the global economy too. That has been reflected in share prices around the world, with US and European markets close to all-time highs. Even the FTSE 100 Index, battered by negative publicity about the UK, is decently up on the year.

So what about 2020? Bumpy politics will continue – that’s an easy prediction – but can there be another year of reasonable growth worldwide, and what might the markets make of that?

The best starting place is America. As it happens, I am writing about two hours’ drive from Mar-a-Largo, Donald Trump’s Florida home, but I don’t think it is helpful to focus on the politics of the US. What matters to the rest of the world is the economy: will it continue to grow through the coming year?

It is the world’s largest economy, larger than the EU and for the time being larger than China. So if it continues to grow, it will pull along the rest of us with it. If not, circumstances will be difficult for all. The mood here has lifted in recent months. The R-word, recession, has largely disappeared. Job growth is fine. There has been a healthy trimming of the price of luxury homes, but property prices have by and large held up. And the dollar, reflecting this, has remained strong.

So this coming year? Predictions are for a year of lack-lustre growth, but with the long expansion (which last summer became the longest since the Second World War) continuing through to the presidential election in November. That is at least in the conventional view, and there is nothing wrong with following the mainstream.

There are, however, three threats: fiscal, monetary, and trade. And they all link together.

The fiscal threat is that the deficit, already running at more than 4 per cent of GDP, will start to frighten investors. So far, they have been remarkably calm, partly because there is a nominal positive return on bonds, unlike in Europe. So European savings have flooded into the US as an unintended, if obvious, result of the policy of the European Central Bank. That has propped up the dollar. European politicians may be sniffy about the US president, but European investors have backed his policies with hard money.

If that flow (and it is not only from Europe) diminishes, other things being equal, US long rates would rise. They may rise anyway. The Federal Reserve will keep short rates down and these do influence longer-dated ones. But no central bank, even the Fed, is all-powerful, and I could see a combination of circumstances, including a rise in inflation, where rates would climb. That would reveal weaknesses in the US financial system that have, up to now, been concealed by ultra-easy money. As Warren Buffett famously observed, it is only when the tide goes out that you know who is bathing naked.

That links to trade. One of the reasons why equities have remained so solid has been the feeling that some sort of trade deal with China is secure. But tension will continue. I expect the president to turn to Europe next year, and with a much more aggressive tone than he has adopted against France for trying to impose a tax on (mainly) US high-tech companies operating there. The Eurozone economy is quite fragile. Some parts are fine, but Germany is projected to grow by only around 0.5 per cent next year. A US recession is unlikely, but a continental European one is quite possible.

And all this is against a background of strong asset prices. The combination of decent US economic performance and still, low interest rates, has supported share and property prices. And share and property prices have supported US consumer demand. I am not saying this is a house of cards. But I am saying that the next bear market, as and when it comes, will do a lot of collateral damage to the real economy.

If you want to put this in political terms, it must be a fair bet that decent economic growth and decent market performance will continue through to November. I’ll give it a bit better than evens, but only that. And afterwards?

It has been a funny year in finance, for this has been one of the most unloved market booms ever. Everyone says it can’t go on, yet the Dow Jones index is up 27 per cent on the year.

Translate this into the vigour of the real economy. I’m not so worried about 2020, but I feel very twitchy about 2021.