Some fear that China will grow old before it grows rich, thanks to the now-reversed one-child policy. Whatever happens in the next decade, its past growth rates are unsustainable. “China is on an irreversible, declining growth path,” and that will have a significant impact on global GDP growth, Patel says.
Beyond 2020
If China isn’t going to power global growth for the next 10 years, it’s hard to see who will. Other emerging markets boast superior rates of GDP expansion, but most are resource-based and many commodities like oil are declining in their importance to the global economy.
“The biggest question the markets are trying to answer is whether this is near the end of a 10-year growth cycle or whether there is another leg up,” observes Michael Cuggino, CEO and chief investment officer of Permanent Portfolio Funds.
Consumers are working and spending, and their balance sheets are in relatively strong shape; while business spending has been soft, it could pick up in the first quarter. Inflation is in check, global interest rates have moved off their lows, and GDP is growing, albeit at a slower pace than many would like. “You don’t see a recession start with that kind of fact pattern,” Cuggino says. “We haven’t seen enough dominoes fall. We’ve entered a period where the Fed isn’t going to move in one direction or the other because the data isn’t compelling.”
James McCann, senior global economist at Aberdeen Standard Investments, expects there will be weak but sustainable growth in America and many other countries for much of the next decade.
As 2019 ended, the consensus was that the U.S. and many other countries could dodge a recession in 2020. It’s a state McCann describes as “stabilization of subpar growth rates.” Germany, a manufacturing-export colossus, suffered last year, but “just managed to avoid a recession.”
Looking at factors like demographics and GDP growth, Americans might find reason to feel their economy is superior to other developed regions like Europe and Japan. In many ways it is. The U.S. dominates key 21st century industries, most notably technology.
But America’s ability over the last two decades to run huge federal budget deficits isn’t permanently guaranteed. At the current rate, the Congressional Budget Office predicts, these deficits will exceed $1 trillion starting in 2022 and run at those levels for the remainder of the decade.
In contrast, the eurozone is barely running a deficit and its largest economy, Germany, has a surplus. The government of Greece, seen as insolvent early in the last decade, is now able to sell 10-year government bonds at practically the same rate as the U.S. Treasury.
DoubleLine CEO Jeffrey Gundlach has predicted America’s federal budget could hit $2 trillion or more in the next recession and wondered who will buy all these bonds. If the U.S. dollar heads south, yield-starved foreign buyers might become sellers.
If the new decade begins with advisors and clients feeling a lot more optimistic than they did 10 years ago, they shouldn’t get too comfortable.