Uncertainty Clouds 2020 Economic Risk Outlook

John Lorié


January 6, 2020

The global economic stage saw an unusual amount of political-related upheaval in 2019, and 2020 is not looking to be much calmer. The main risk to business remains trade policy uncertainty, which discourages business investment, negatively impacting many sectors and firms throughout entire supply chains.

2019: Trade Growth at a Standstill
In 2019, global economic growth slowed to 2.5%. While this is not bleak enough to be called a recession, global trade growth is ending the year almost at a standstill.

Nearly every region aligns with this trend, including the United States, the EU (particularly the UK) and emerging economies. A short list of examples: Italy saw a 4% expansion in business failures, Turkey narrowly avoided a recession in 2019, Russia and South Africa saw exceptionally weak growth, Brazil is still slogging through a slow recovery, and there is no adjective to describe Argentina right now other than “messy.” In other words, business conditions around the globe are weak.

No surprise, major factors behind this slowdown are the expansion of tariffs between the United States and China and the long-lingering Brexit saga. By the end of 2019, approximately $550 billion of trade between the United States and China (3% of global trade) will be subject to tariffs, thanks to another round of escalation in the early fall of 2019. No region is escaping unscathed from the rippling effects of the trade wars, but businesses in the United States, China and emerging Asia have so far been hit the hardest.

Facing a historically high level of uncertainty on top of already declining business confidence, many companies across a variety of sectors spent the year holding their breath, waiting to see how things would unfold. Essentially, the business world is in the midst of a negative cycle of lower investments, which leads to lower growth and higher insolvencies. In fact, 2019 marked the first year in a decade that developed economies saw an annual increase in corporate insolvencies. Leading this trend is North America, with a 4.2% increase in insolvencies.

Sectors directly affected by the trade war included manufacturing, steel and auto. Exports of electronics from China into the United States steeply declined throughout 2019, replaced by exports from Vietnam, Taiwan and Korea. U.S. exports of aircraft and vegetable and animal products also came under pressure. In short, any firm in China or the United States that relies on inputs that must be imported from the other country is facing higher costs. Some sectors can pass those costs along to the consumer or the next step in the supply chain. Some are not so lucky. Hence the increase in business insolvencies.

2020: New Year, Same Problems
As we enter 2020, the global economy’s slide will continue. The threat of recession lingers, but is still not imminent. However, private consumption might save the day. Even in the face of slowing economic growth, household consumption in North America and Europe remains positive thanks to strong labor markets. That said, any shock that sends consumers into savings mode could land the United States in a recession. Risks include a stock market crash, an expansion of trade tensions with Mexico (which would strain U.S. manufacturers) or a spike in oil prices.

The most significant risk to business growth remains trade war proliferation. While a “phase one” of a more comprehensive trade deal between the United States and China has recently concluded, escalations are certainly possible, while the EU is also in danger of new tariffs from the United States on cars and car parts. If enacted, these tariffs would have severe ramifications for EU firms, particularly the German auto sector, which is already facing difficult conditions and struggling with revised emissions standards for diesel vehicles. Brexit also continues to be a sore spot for the economy, causing difficulties for firms in the UK and all across the eurozone. Even though Brexit is now a certainty come January 31, uncertainty will remain as the UK shapes a new trade policy with the EU.

Related, but broader, policy uncertainty is another major risk—any missteps by major governments right now could damage the already-precarious economy. China, for instance, is managing a complex change toward a consumption-led economy while also dealing with high levels of debt. If the debt situation spirals out of the Chinese government’s control, this could cause havoc for the economy and put immense pressure on businesses the world over.

All this uncertainty means business insolvencies will continue to rise, increasing by at least another 2.6% in 2020, with North America still expected to lead the way with another 3.9% expansion. Firms are grappling with lower business investment and external demand and higher import and labor costs, both cutting into profits. The agricultural sector will feel some pressure in 2020, and there is no end in sight for the challenges plaguing retail. Exacerbating all of this are the high levels of corporate debt, as businesses have been eagerly taking advantage of the past few years of easy access to finance at low interest rates—this increases their vulnerability to economic and financial shocks. When businesses become insolvent, their trading partners suffer, creating a ripple effect of risk.

Amid all the noise about Brexit and the trade war, climate change has flown under the radar a bit, but this remains a considerable area of risk for businesses into 2020. While most are aware that massive investments and public-private partnerships are needed, that is not happening at the moment. There are some initiatives in the private sector to transform the economy toward cleaner energy and less carbon-intense economies, but not enough governments are on track to meet the Paris agreement. This is expected to be an increasing part of the conversation as the trade wars quiet down.

While the growth and insolvency outlooks are not exactly sunny heading into 2020, it is worth noting that with insolvencies only expected to grow 3%, a recession is not likely and if one does occur, it will be mild.
John Lorié is chief economist at Atradius Credit Insurance and a researcher at the University of Amsterdam.