Service Sector Resilience to Help Global Growth Stabilise in 2020

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The resilience of the service sector and consumer spending growth in the advanced economies should help global growth stabilise next year, after a sharp decline in 2019, says Fitch Ratings in its new Global Economic Outlook (GEO).

“There are few signs of any imminent rebound in global manufacturing, but the service sector plays a much bigger role, particularly in the advanced economies. Provided the manufacturing downturn does not intensify, the more stable picture in services should help global growth level-off next year,” said Brian Coulton, Chief Economist at Fitch Ratings.

The service sector accounts for 70% of GDP in advanced economies and growth has been much steadier over the last 18 months than in manufacturing. The rise in trade protectionism and the impact of rising trade policy uncertainty on business investment has taken a much bigger toll on manufacturing than services in the advanced economies, as has the slowdown in emerging markets. While there have been some recent signals that the manufacturing downturn may be starting to ease, there is nothing to point to any significant recovery.

However, service sector activity is much more sensitive to consumer spending, which has failed to slow at all in the US over the last couple of years and has recently picked up slightly in the eurozone. Tight labour markets, solid growth in household incomes and improved household sector finances are helping to support consumer spending.

Consumer momentum – allied with recent moves to a more expansionary fiscal policy stance in many large economies and a likely bottoming-out of growth in China in the first half of next year – should help global GDP growth stabilise in 2020. Our global GDP growth forecasts are unchanged from the September GEO and show world growth falling to 2.6% this year from 3.2% in 2018. World growth is expected to edge down slightly in 2020 to 2.5% but then recover modestly to 2.7% in 2021.

“Global monetary policy easing has broadened and intensified in recent months but we do not expect any further interest rate cuts from the Fed. We also doubt that recent widespread monetary easing will prompt a recovery in global growth,” added Coulton.

In the absence of any concrete announcements on a so-called “Phase 1” trade deal, our forecasts continue to be based on an assumption that US tariffs on Chinese imports rise further. Incoming data since the last GEO has been broadly on track with our earlier expectations.

US GDP growth of 2.3% is expected in 2019 before falling to 1.7% in 2020 as fiscal support starts to fade. We forecast eurozone growth at 1.2% in 2019 and 1.1% in 2020 and expect China to slow to 5.7% next year from 6.1% in 2019. Other than a slight upgrade (of 0.1pp) to eurozone growth this year, these forecasts are unchanged since the September GEO, consistent with our unchanged aggregate global growth projections.

However, there have been a number of individual country revisions, most dramatically a sharp cut to India’s 2019-20 growth forecast to 4.6% from 5.5% in the September GEO on the back of a sharp squeeze in credit availability, weighing on consumption and investment. Forecasts for Mexico and South Africa have also been reduced. Nevertheless, we expect growth in emerging markets excluding China to recover in 2020 thanks to a return to positive growth in Turkey and a pick-up in Russia and Brazil, where our forecasts for 2019 and 2020 have been upgraded.

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