Analysis: How likely is a recession in 2020?

The mood of the market turned quickly at the end of last year. Photo / Getty Images

The 2010s were a turbulent, transformative and testing time for the global economy but there was not a recession.

That is extremely rare. In fact, it is the first decade in the post-world war II era without a downturn in the UK and US.

A year ago many economists thought the global economy would be crawling over the line into the 2020s and would suffer a recession soon after.

The trade war had escalated at a frightening pace, Brexit was in deadlock, global factories were heading into a deep industrial recession and central banks appeared to be oblivious to the threat of a downturn. The market's most-trusted recession signal - the US Treasury yield curve - then flashed red, predicting one within 24 months.

But the mood on markets has turned on a pinhead.

An ageing, and in some parts of the world record-long, economic cycle appears to have been given a shot in the arm. City forecasters have pencilled a slight acceleration in global growth from 2019's post-financial crisis low of 3pc to 3.1pc this year and 3.2pc in 2021. What changed?

The headwinds that threatened to tip the world into the next economic crisis have waned substantially. The US and China have reached an agreement for a "phase one" trade deal, potentially putting a pause on the protectionist wave sweeping the globe.

Boris Johnson's decisive victory in the election will not only get his Brexit deal over the line but gives him more wriggle room in the next stage of negotiations.

And crucially central banks have moved from tightening financial conditions to cutting interest rates and ploughing more money into markets.

The Federal Reserve, the US central bank, cut borrowing costs three times this year and moved from reversing quantitative easing - its bond-buying programme - to expanding its balance sheet again. The European Central Bank has also extended its experimental policies to revive growth, cutting rates deeper into negative territory and restarting its QE programme after an ill-conceived attempt to end it a year ago.

While many economists fret central banks will now not have the firepower to fight a recession if one does strike, the latest burst of stimulus has catapulted stock markets to new record highs. Global stocks have followed their worst year since the financial crisis in 2018 with their best, gaining 25 per cent last year.

But with growth still languishing at post-crisis lows, are investors sleepwalking into the next recession?

Most Wall Street analysts have predicted that the US-China breakthrough and the Fed's policy U-turn will be enough to stave off recession.

The US became the focus of recession jitters earlier this year given its importance to global growth. When America sneezes, the rest of the world still catches a cold - even as economic powers in the east rise.

However, Philip Marey, Rabobank's senior US strategist, warns the euphoria on markets over the trade deal has been "overdone", predicting the US will enter a recession in the second half of this year.

The deal struck by Beijing and the Trump administration picks the low-hanging fruit of agricultural products and rolling back tariffs but fails to tackle the key sticking points between the two countries, such as intellectual property.

Marey also argues that business investment remains low and the slack left in the US economy - the resources of an economy not being used - is very small, capping the room for growth. A key risk is that business worries feed through into the jobs market and hit the confidence of consumers, whose spending accounts for around 70 per cent of US GDP.

More rate cuts from the Fed would not be able to support growth further, he argues.

"It is really ineffective in supporting business investment and that is where the real bottleneck is at the moment," he says.

"For businesses, interest rates are low anyway so that is not their main concern."

The US election in November will start to come into focus for investors, generating another source of uncertainty for businesses.

Signs of a recession brewing in the US could severely dent Donald Trump's chances given the strong economy is seen as stopping his approval rating sliding any lower.

Four more years of Trump will increase the risk of another trade standoff but some of his Democratic challengers are equally problematic for businesses and investors.

Bernie Sanders and Elizabeth Warren - who are currently polling in second and third place ahead of the Democratic primaries - are two leftist populists with plans to radically redistribute wealth and take on Wall Street.

Citi global chief economist Catherine Mann says uncertainty from trade and politics "matters for the global economy".

"The several risks that have been weighing on the global outlook have not dissipated, and there is a non-small probability that these intensify in 2020."

While most investment banks believe the threat of an immediate downturn has been pushed back, she warns that the "risk of recession still does loom over the economy".

The relief from a prolonged and economically damaging period of uncertainty in the UK could also be brief.

Even with the Brexit deadlock broken, economists expect growth in the UK to be tepid again this year, slowing further from around 1.3 to 1.1 per cent.

With the prime minister insisting on a final trade deal with the EU being agreed before the end of the year, more uncertainty could plague businesses and the UK economy. No-deal Brexit worries could return in the second half of the year.

Berenberg UK economist Kallum Pickering is more optimistic, predicting that growth will hit 1.8 per cent this year after being boosted by the fiscal stimulus promised by the Conservatives.

"An orderly Brexit can lift confidence and spending in the next two years after more than three years of heightened uncertainty and gradually softening momentum," he says.

Economists expect much of the business investment lost over the last three years to return but estimates of how much can be lured back vary from around a quarter to a half. Some of the investment will be lost forever, however.

Torsten Bell, chief executive of think tank the Resolution Foundation, warns that Britain's buoyant jobs market could turn in 2020. This could weaken the economic boost provided by record employment levels and shoppers enjoying their biggest pay rises since the last recession.

"Our best guess is that 2020 will be very different from the last few years," Bell says. "We may well see a welcome return to record pay levels, but a less welcome retreat from record employment, with worrying signs including falling vacancies and rising youth unemployment."

Meanwhile the eurozone economy is expected to be weighed down again by Germany in 2020, with the impotent ECB unable to provide much stimulus and Northern European governments refusing to boost spending.

China, which has been hit hardest in the industrial recession triggered by the trade war, is also expected to slow further. City forecasters are predicting its growth will sink below the symbolic 6 per cent mark despite Beijing's huge fiscal and monetary stimulus efforts to pep up the economy.

While most economists believe a recession will now be avoided in 2020, the ability of policymakers and central bankers to revive growth is severely limited, if one does strike.

The world economy is facing at the very least a prolonged period of stubbornly slow growth that will be difficult to escape.

- Telegraph