The world economy dodged a number of bullets in 2019, most notably fallout from the various trade wars. All of the major economic forecasts for 2020 project slowing, but still positive, GDP growth in the larger economies (OECD economies and China). That leaves growth opportunities for small and medium sized businesses (SMEs) around the globe, but particularly in developing economies in parts of Asia and Africa. The major caveat to this outlook is that, although the US is projected to continue to grow at a 2 percent clip, an unexpected event could quickly and sharply reverse the US trajectory.
At the International Business Accelerator (IBA), we work with SMEs to develop cross-border markets and we examined the leading economic forecasts to guides our clients when looking for expansion opportunities. I was an international economist for the US Department of State and the following perspectives are based on years of forecasting (successes and failures) around the globe.
A CONSENSUS OF FORECASTS
In the last three months, the major economic forecasts have closed in a relatively narrow consensus for 2020.
The only major difference in the forecast is with India, which has many political variables playing into its outlook.
In sum, most areas of the world will have slower GDP growth. The other headline is that India replaces China as the fastest growing large economy.
Looking deeper into the crystal ball, the IMF medium-term outlook projects a continued slowing of the larger economies as opposed to emerging economies, which will evolve at a faster pace.
Risks: Upside and Downside
As with any forecast, one needs to note the upside risks (growth will be greater than forecast) versus downside (less than expected growth). For the coming year, there are few upsides and many potentially significant downsides.
There are two potential scenarios which could lead to greater than expected growth:
- An increase in US economic growth due to Federal Reserve Bank interest rate cuts. In my view, such cuts would have minimal impact. The expansion is already ten years old and has been on life support due to repeated interest rate and tax cuts. Real (after inflation) rates are currently below zero in most major economies.
- A truly significant US-China trade deal. The deal announced in early December is, based on what has been announced publicly, merely a cease fire between the parties to allow continued negotiations. China holds the cards in these talks and has little incentive to make a full deal (which would require a substantive restructuring of the Chinese economy) before the US Presidential elections.
There are many downsides that could lower global economic growth:
- US-China trade war worsens
- Consumer confidence becomes negative in the US
- A hard Brexit that throws the UK (and possibly the Continent) into recession
- Shifts in Commodity Prices
- Increases in unemployment rates due to automation impacts – especially traditional retail
- Unforeseen events – a Coronavirus pandemic, war in the Middle East
Most economic models are built on the assumption of continuing economic momentum. That is why the models rarely pick up on sudden economic changes, most often brought on by financial bubbles. It is worthwhile to remember what was being said just before the Great Recession. In July 2007, the Federal Reserve, in its Monetary Report to Congress, said “The U.S. economy seems likely to continue to expand at a moderate pace in the second half of 2007 and in 2008…Financial market conditions have continued to be generally supportive of economic expansion thus far in 2007, though there was a notable repricing in the subprime-mortgage sector.” In hindsight, that was the understatement of the decade.
What are the potential financial bubbles of 2020? Corporate non-financial debt in the US is more than 75% of GDP, an all-time high. US corporations have taken advantage of years of low-interest rates and are leveraged to the hilt. The ratio of total stock market capitalization to GDP is also at an all-time high, surpassing that of the Dot.com bubble of 2000.
Opportunities by Region
United States: The growth opportunities are found in applications of Frontier Technologies (AI, Blockchain, Cloud Computing, 3D printing and MedTech). These technologies are now a maturity level where they can be applied at a reasonable price to economic and social problems. Trade disputes with China are having impacts on US supply chains. Given the potential downsides, cash remains king in this market. Companies that are exclusively focused on the US market are vulnerable to downturn. At the IBA, we work with US companies to go global and diversify.
EURO-Zone: The economies continue to flirt with recession, despite negative nominal and real interest rates. Germany is facing an election and a new coalition government could be difficult to form. As noted with the US, opportunities are there for applications of Frontier Technologies.
United Kingdom: The final shape of a Brexit deal with the EU casts a shadow of the economy. If the UK does not gain free access to the EU, there could be a major hit to the economy. On the other hand, the continued weakness of the Pound presents great opportunities for investors. One IBA participant is acquiring a company in the UK to expand its business and the UK authorities are actively supporting even small business investment in the UK.
Japan: The fundamental challenge of Japan remains its dwindling population, which declined by half a million in 2019. Japanese corporations continue to drive incremental productivity, but opportunities for non-Japanese companies to sell Frontier Technologies directly in Japan remain burdened by administrative barriers.
China: A 5.7% growth rate is still impressive by any measure, but it is down from the 6-8% levels of recent years. China has its own credit and real-estate bubbles and it is still difficult for non-Chinese SMEs to sell directly into China. In the 2020s, China is also hitting a demographic wall as the impacts of the one child policy hit the labor force.
India: With projections of growth anywhere from 6.2-7.0%, India has eclipsed China as the world’s fastest-growing major economy. There are many challenges with doing business in India (negotiating styles, logistics, corruption), but a number of IBA participants have found great opportunities in this fast-growing region. The high-percentage of English speakers is accelerating India’s entrance into the global economy.
South-east Asia: The countries of Vietnam, Philippines, Thailand, Indonesia and Malaysia are the beneficiaries of the disruption of supply chains caused by the Trump Administration tariffs on China. These countries have also been able to leap-frog development stages with the rapid introduction of mobile technologies.
Latin America: Economic development in this region is being slowed by domestic political issues. The major economies have not translated investments into tangible social progress. The newly signed US-Mexico-Canada (USMCA) trade agreement will likely have no measurable impact in 2020. Our IBA participants have found that online sales are a growing opportunity in those countries with which the US has a Free Trade Agreement (basically all the countries with a Pacific Ocean border).
Middle East – North Africa (MENA): Economic growth in this region continues to be closely aligned with oil prices. Crude oil is forecast to remain around current levels for 2020, allowing for moderate growth. Most of the countries in the region have policies to favor diversification of their economies away from oil and our IBA members have found opportunities selling products and services that support new markets.
Africa (Sub-Saharan): The continent has three major currents. South Africa continues to sort through political issues and dependency on mineral exports. It has thus only a 1% growth forecast. The oil exporting countries in central and west Africa have slightly higher economic growth potential, but the growth is bounded by sluggish oil prices. The highlight in the region remains east Africa. This region has capitalized on the rapid introduction of mobile phone technology to develop new products and business models. IBA companies have found many promising leads in the region for a variety of products – traditional to Frontier Technologies.
Focus on Future Innovation
Despite the region, we at the IBA have found opportunities across the globe in innovative technologies. Business in this decade will not be like that of the first two decades of this century. The pace of innovation will accelerate as the price point for the Frontier Technologies drops. Highly disruptive products and services will evolve, developed by what are now start-up and early stage companies. These new ideas will come from around the globe and won’t be localized in areas like Silicon Valley or the corporate research facilities in Japan or Europe.
To support this growth, the IBA is teaming up with incubators, accelerators and universities in various regions around the world. In 2020, we are starting an initiative with incubators in Egypt, Ghana, El Salvador, Guatemala and Chile to allow them to present to US investors and to access technical expertise here in the US.