Goldman Sachs predicts global economic “break in clouds” for 2020

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The global economy will likely shake off this year’s economic slowdown, led by the U.S. as low mortgage rates bolster the housing market, according to a Goldman Sachs forecast.

Global economic growth likely will quicken to 3.4% in 2020 from 3.1% in 2019, according to the forecast. That’s still a slower pace than 2018’s 3.8% and 2017’s 3.9%.

The U.S. economy probably will expand at a 2.3% pace in 2020 and increase to 2.4% in 2021, the forecast said.

“We are reasonably confident that US growth is improving, for three reasons,” the investment bank said in a forecast on Wednesday. “First, the sharp drop in mortgage rates has reinvigorated the housing recovery after a slowdown in 2018 and early 2019. The structural outlook for housing is also strong, as the level of building activity remains well below demographic demand.”

The average U.S. rate for a 30-year fixed mortgage was 3.69% in October, compared with 4.83% a year earlier, according to Freddie Mac data.

Another economic boost will come from a de-escalation in trade tensions between the U.S. and China, according to Goldman Sachs. The world’s two largest economies are working on a “Phase 1” preliminary deal to end the trade war. Reuters reported on Thursday the deal may not be signed until next year. The Wall Street Journal reported on Tuesday negotiations may be at an impasse.

Goldman Sachs economists believe the deal is “likely to be signed in the coming weeks.”

“We expect the global growth slowdown that began in early 2018 to end soon, in response to easier financial conditions and an end to the trade escalation,” the forecast said. “Although much could still go wrong, the news on trade policy – both US-China and issues related to Brexit – has gotten better in recent weeks.”

The 2.3% pace of economic expansion projected for the U.S. in 2020 compares to a 1.1% growth pace for the European Union area and the U.K. In Japan, the forecast projects a 0.4% expansion, and in Russia, the pace likely will almost double to 2.2% in 2020 from 1.3% in 2019.

“Our confidence that growth will improve sequentially is highest in the US, where demand is most responsive to financial conditions, and the UK, where we expect the Brexit drag to reverse and fiscal policy to ease,” the forecast said. “We look for a more gradual pickup in Europe, where the fiscal boost is likely to remain limited, and Japan, where we are watching carefully for a negative impact from the October consumption tax hike. We expect growth in China to slow modestly from just above 6% to just below, in line with gradually decelerating potential.”

The global outlook for inflation, closely watched by the bond investors who influence mortgage rates, will remain tame, according to the forecast.

“Across many advanced economies, we expect continued labor market improvement and upward pressure on wage growth, which is likely to push unit labor costs above central bank inflation targets,” the report said. “However, the pass-through to core price inflation should remain limited.”
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