Sovereign outlook 2020

Slow growth of around 3%, rising imbalances and persistently unpredictable policymaking will set the tone for the global economy in 2020 as the onus to boost growth falls increasingly to governments and fiscal policy rather than to central banks.

Scope Ratings agency says in its 2020 sovereign outlook that among the main downside risks for the European and global economies are unresolved trade disputes, rising levels of global indebtedness, the structural slowdown in China’s economy and overvalued asset markets.

“The global expansion cycle is in a mid-to-late phase,” Giacomo Barisone, head of public finance at Scope, says. “Policymakers face significant challenges in 2020 amid slowing economic growth in the US and China and sluggish growth in the euro area. We are confident that very accommodative monetary policy and looser fiscal policy will help limit the extent of the slowdown, however.”

Scope’s forecast of global growth of around 3% next year is comparable to an estimated 3.0% expansion in 2019, but below recent peak rates of 3.6% in 2018 and 3.8% in 2017. In the euro area, Scope estimates 1.1% growth next year, after an estimated 1.2% in 2019. In addition, sluggish 2020 global growth reflects slowdowns in the United States, China and Japan, offset by recoveries in some emerging markets, like Russia and Turkey.

Policy and political uncertainty will also continue due to the US government’s trade policies and Brexit. In the run-up to November’s presidential election in the US, the US-China trade conflict could re-escalate and disrupt global supply chains while the UK’s exit process from the EU will likely only move to its next, even more difficult phase after the general election later this month.

“Interest rates will remain very low, if not negative, in 2020, supporting the global economy as well as sovereigns’ debt dynamics and liquidity,” Barisone says. “The catch is that such highly accommodative financial conditions continue to fuel a global build-up of debt, increasing what are already significant macro-financial imbalances, with longer-term implications for sovereign ratings globally.” The latest figures from the Bank for International Settlements point to a new high in total global private and public non-financial-sector debt stocks, at $184 tln as of Q1 2019, or 238% of total GDP. The US, China, Japan and the euro area account together for around 72% of global debt.

More expansionary fiscal policies are expected in 2020 in many countries – equivalent to around 0.4% of potential GDP in the euro area – but they are unlikely to provide enough support to return global growth to higher 2017-18 rates. In Europe, for example, Germany and the Netherlands have significant fiscal room to stimulate their economies, but the space is more limited in many other countries that are either already pursuing or considering implementing fiscal stimulus, like China, Italy, the US, Japan and Turkey.

From a European perspective, this difficult set of circumstances should coax new EU leaders into pursuing more ambitious, coordinated structural and institutional reforms for the region, including the completion of the EU’s Banking Union. Governments and supranational institutions are equally likely to pay increasing attention to environment, social and governance risks in 2020. This includes, critically, risks related to climate change.

As for sovereign creditworthiness itself, the current “risk-on” market condition of low credit spreads contrasts with Scope’s view of a challenging environment in 2020 for governments and, by extension, for sovereign ratings. Scope’s sovereigns with a Negative Outlook are the UK, China, Turkey and Romania, while Greece, Portugal, Russia and Lithuania hold a Positive Outlook.

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