The most probable scenario for the global economy and financial markets this year is fairly obvious: continued GDP growth, rock-bottom interest rates and rising equity prices. It's more useful to identify which unlikely events would alter this likely benign scenario—and consider how unlikely they really are.
The traditional January game of economic forecasting for the year ahead hardly seems worth playing when the predictions have been the same for a decade. In 2020, it is even more likely than it has been every year since the financial crisis that the global economy will continue growing, interest rates will remain at rock-bottom levels and stock markets will keep rising.
So, instead of predicting the most probable scenario, which is fairly obvious, it is more useful to consider unlikely events that would alter the likely benign scenario. I believe 10 risks could cause the most economic and financial trouble in 2020. These are not predictions: continuing global expansion is more probable than any combination of these setbacks. And they are not “surprises,” which, by definition, are impossible to foresee. Rather, they are “known unknowns,” arranged from the lowest risk to the highest, in my view.
The smallest risk is the one that many economists predict every year: a global recession, caused by the United States or China. A recession is inevitable, but less likely in 2020 than in any of the previous 10 years. While investment and manufacturing worldwide have suffered from the U.S.-China trade war, macroeconomic policies in both countries have boosted housing, services and public spending. The world economy will continue to benefit this year from a tailwind from last year’s U.S. interest-rate cuts and China’s efforts to support roughly 6% growth. Absent some powerful new shock, recession in 2020 is therefore extremely unlikely.
Likewise, there is a negligible risk of higher interest rates. Many investors and businesses are worried that today’s low-interest-rate environment may soon end, at least in the U.S. Inflation and long-term interest rates will probably rise somewhat this year, but it is almost out of the question that central banks will tighten monetary policy. The Fed would lead this process, and it will not raise rates in an election year.
In Europe, instead of triggering an epidemic of Euroskepticism, Brexit has acted like a vaccination. Even the populist leaders in Italy, France and Germany seem deterred by the Brexit experience, and this year’s negotiations on a post-Brexit trade deal will reinforce Europeans’ negative perceptions of the process. But politics is always volatile, especially in Italy, so a politically driven euro crisis remains a low but non-negligible risk.
Although the U.S.-China trade war grabbed the most attention in 2019, Europe was actually the weakest link in the world economy. Recently, Europe’s economic performance has stabilized, and policy has improved dramatically, with the European Central Bank restarting quantitative easing and political sentiment turning against fiscal austerity. But Germany’s economy still faces an existential crisis, and European politicians have an almost unbroken record of foolish efforts to cut budget deficits when their economies need fiscal support. A European recession therefore remains the biggest macroeconomic risk in 2020, just as it was last year.
Then there is the threat of a major energy disruption. Since the U.S. assassination of Iranian Quds Force commander Qassem Suleimani, financial markets have been worrying about a spiral toward war and a spike in oil prices. Every global recession in the past 50 years has been preceded by a doubling of the oil price (although not every doubling of the oil price has been followed by a recession). To double year on year, oil prices would have to soar above $110. This is unlikely, but possible if a U.S.-Iran war stopped shipping in the Persian Gulf. An oil-induced recession is therefore a moderate risk.