Risk insight: Trade war is the top risk for investors in 2020

Jérôme Haegeli, group chief economist at Swiss Re, examines the top risk trends impacting investors including high risks of trade war and why protracted Brexit negotiations with the EU will keep economic uncertainty high. 

Jérôme Haegeli, group chief economist at Swiss Reposted on Thursday, January 23, 2020

“Will the 20s roar again?" asks Jérôme Haegeli, group chief economist at Swiss Re. "We will see, but we are definitively overdue today for a new recipe for sustainable and inclusive growth. Nevertheless, global growth and yields will remain subdued."

"Our view of sluggish global growth and subdued inflation remains fully intact. Given the progress on US-China trade talks and Brexit in the UK, we have revised down the risk probability of US recession to 30 per cent.

"As a result, we expect no further rate cuts by the Fed and revised up our forecast of the US 10y yield to 1.7% for end-2020 and 1.9 per cent for 2021. Overall, central banks are expected to remain very accommodative. "

Key takeaways

  • Our baseline scenario of a continued growth slowdown in key markets remains intact.
  • Despite the US-China trade détente, the trade war remains a key risk into 2020.
  • The UK is on course for orderly Brexit on 31 January. This will boost sentiment in the near term, but protracted negotiations with the EU will keep economic uncertainty high.
  • We revised down the probability of US recession to 30 per cent, from 35 per cent last month.
  • We expect monetary policy to remain very accommodative in most key markets but enough green shoots to expect no further rate cuts by the US Fed.

What's new in the risk landscape?

In spite of a tentative détente between the US and China, global trade tensions remain 

While the US and China are expected to sign a 'Phase one' trade agreement on 15 January with likely roll-backs on some of the imposed tariffs, the global trade landscape remains tense ahead of the US election this year.

For instance, the US imposed sanctions or restrictions on Chinese companies across several industries, imposed higher tariffs on EU goods triggered by Airbus-Boeing dispute, rising tension over the digital tax between the US and EU, and potential climate-related tariffs on countries without carbon taxes.

All implies a complicating landscape of global trade that will continue weighing on economic growth. Trade war remains the top risk facing global economy in 2020.

"No-deal Brexit" off the table for now: UK Prime Minister Boris Johnson's Conservative Party won a majority in the general election last month, putting the UK on course for orderly Brexit on 31 January 2020.

This should boost economic sentiment in the near term. Yet, uncertainty around the future trade relationship with the EU will remain elevated.

We expect negotiations with the EU to progress in "phases". A trade deal in some goods sectors may be within reach by the end of the transition period (end 2020) while an agreement in services trade is likely to take longer.

The risk of ending up with no trade deal may resurface towards year-end.

Monetary policies to remain very accommodative in advanced markets: amid sluggish and fragile economic momentum, major central banks will remain very accommodative in 2020.

Geopolitical tension elevated in the Middle East: The situation in the Middle East has raised concerns of further military confrontation.

At this stage, we believe the higher oil prices has a limited impact on the global economy and see the fallout on financial markets to be limited for our base case.

The US, for instance, is now less vulnerable to overseas oil supply as it has become a net oil exporter since November 2019. In any case, the tensions need to be closely monitored.

How are risks evolving?

US recession

Economic momentum is softening.

External headwinds have already pushed the manufacturing segment into a contraction, and forward-looking capex indicators remain soft.

These are in part offset by progreses in US-China trade negotation and increasing clarity on Brexit.

The risk of the US economy entering recession in 2020 is estimated to be 30 per cent. 

Trade war

US-China tensions continue to ebb and flow. Despite a foreseeable 'phase one' deal in the mid-Jan, we expect no meaningful resolution anytime soon.

The WTO ruling on Airbus has complicated US-EU relations; same with French (and other countries' potentially upcoming) digital tax laws.

Higher auto sector tariffs pose a key risk.

Key to watch: US-China trade talks, roll back of announced US-China tariffs in the coming months; Trump's decision on the auto sector and digital tax laws; USMCA

Central bank policy error

Monetary policy normalisation made a U-turn toward easing in 2019, reducing but not eliminating the risk of a policy error that would lead to an excessive tightening of financial conditions.

By contrast, longer-term risks associated with prolonged monetary expansion are on the rise.

Key to watch: 15 Jan: BoE meeting, 23 Jan: ECB meeting, 29 Jan: Fed meeting

Destabilisation of the EU/Euro area

TThe risk of a disorderly Brexit has declined significantly. Nevertheless, several conflict areas within the EU remain, including migration policy, national budgets and the rule of law. Other unresolved issues, such as fragmented financial markets, fragile banking sectors and elevated debt burdens, could surface again in the next downturn.

Key to watch: Italian budget discussions, Brexit developments, ECB/EU Commission agenda under new leadership .

Inflation risks

Inflation has remained sluggish despite low or decreasing unemployment, accelerating wage growth, and strength in the services segment.

With central banks back in easing mode and geopolitical tension in the Middle East elevated, inflation could increase to above target levels. Slowing growth, however, should dampen the risk.

Slowing growth, however, should dampen the risk.

Key to watch: Oil prices, 20 Dec: US PCE, 7 Jan: Eurozone HICP, 14 Jan: US CPI .

Chinese hard landing

The risk of a debt-driven hard-landing of the Chinese economy has stabilised as a result of earlier strong government efforts to deleverage the corporate sector and better manage shadow banking activities.

Further monetary easing is expected to be limited taking into consideration of rising inflationary pressure.

Key to watch: central bank actions, financial reforms, current account deficit, renminbi depreciation, 10-year US-China yield spread

Emerging market contagion

Many emerging market central banks have shifted towards easing-bias. More room for easing measures lowers growth risks for emerging markets.

In an adverse scenario, external financing dries up and an investor panic could lead to an indiscriminate withdrawal of funds from EMs.

Key to watch: Sudden USD strengthening, higher DM sovereign bond yields

Stronger global growth

Stronger growth (than baseline) could come from a medium-term resolution of the US-China trade disputes and tariff roll-back, faster decline in unemployment / stronger wage growth in the Euro area and the US, larger than expected fiscal stimulus in Europe and China, or a less damaging growth impact from Brexit.

Key to watch: Strong credit impulse, Brexit negotiations, real interest rates

Regional forecasts


The manufacturing segment remains in recession, while the services sector is holding up well.

The overall economy is expected to slow compared to 2019 but avoid a recession.

As the downside risks appear to have diminished, we have revised up our interest rate projections and the Fed funds forecast.

Euro area

Given reduced risk from Brexit and progress in US-China trade talks, we expect no further cuts to the ECB's deposit rate.

We have also revised our German yield forecast slightly higher, but still expect yields to remain very low over the next two years. .

United Kingdom

We expect reduced Brexit uncertainty to provide a boost to economic sentiment in the near term.

Coupled with some fiscal stimulus, this should help stabilise growth. We expect the BoE to keep rates unchanged.


Retail sales improved in November, bouncing back from the October drop due to the VAT increase, however, y-o-y retail sales are still down over 2 per cent.

We expect the economy to slow in 2020, but PM Abe's stimulus package and the Tokyo 2020 will provide some support.

Policy rates are expected to remain unchanged..


Economic growth in China is stabilising but monetary policies will remain accommodative in view of still significant downside risk.

Official manufacturing PMI stayed in the expansionary territory in December alongside faster growth of industrial production.

The PBoC cut RRR by 50bps in January, reiterating a persistent accommodative monetary stance ahead of the holiday season.


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