By Timothy P. Speiss
The first quarter of a new year is always a good opportunity to see if the economic prognosticators are on track with their investment outlooks for the year ahead. One forum that has been, and again promises to be, a valuable source of financial information is the annual Lido Family Office Symposium in March of this year. EisnerAmper is proud to be a gold sponsor at this 15th annual symposium being held in Santa Monica.
To help put the discussion into context, let’s examine some previous commentary from leading information sources on investment opportunities and economic outlooks, being with the World Bank’s venerable January 2020 Global Economic Prospects. Global economic growth is forecast to edge up to 2.5% in 2020 as investment and trade gradually recover from 2019’s weakness; however, downward risks still persist this year. Growth among advanced economies is anticipated to decrease to 1.4% in 2020, in part, due to manufacturing. Growth in emerging markets and developing economies is expected to accelerate this year to slightly more than 4%; this assumes the improved performance of a small group of large economies, some of which are emerging from a period of substantial weakness. The World Bank cites that about 30% of emerging market and developing economies are projected to decelerate this year due to weaker-than-expected exports and investment.
The January 2020 Global Economic Prospects also cites downside risks to the global outlook including a re-escalation of trade tensions and trade policy uncertainty, a sharper-than-expected downturn in major economies, and financial turmoil in emerging markets and developing economies. According to the report, even if the recovery in emerging and developing economy growth takes place, per capita growth will remain well below long-term averages and levels necessary to achieve poverty alleviation goals.
U.S. growth is forecast to slow to just under 2% this year, reflecting the negative impact of prior tariff increases and related uncertainty pertaining to the cross-border purchase and sale of goods. Likewise, Euro-area growth is projected to fall a revised 1% growth rate this year in contemplation of weak industrial activity and the continuing impact of Brexit.
Hutchins Center on FIM
U.S. tax policy, including tax reform in 2017, boosted growth in inflation-adjusted Gross Domestic Product (“GDP”) by 0.5% relative to its longer-run potential in Q3 of 2019, according to the Hutchins Center on Fiscal Impact Measure (“FIM”) at the Brookings Institution. The FIM, dating back to 2000, traced significant federal fiscal stimulus during and after the Great Recession; the tightening of federal spending 2012-14; and other effects that local, state and federal fiscal policies had on economic growth.
U.S. GDP grew at an inflation-adjusted annual rate of 2.1%, according to government estimates. According to the FIM report, federal spending and social benefits have helped lift the FIM above zero for several quarters, indicating that fiscal policy is, in fact, boosting growth. The FIM is now near its highest values since 2010. Looking forward, tax and spending policies at all levels of government are expected to add about 0.6% to growth in Q4 of 2019, but add less to growth in the first half of 2020. The FIM forecast indicates that during the fiscal year that began October 1, 2019, federal spending will lift GDP by about 0.11%, compared to 0.07% in the previous fiscal year.
Federal spending rose at an annual rate of 3.3% in the third quarter, driven primarily by increases in nondefense spending. Federal spending rose modestly at the beginning of this fiscal year, but it has been stronger over the past two quarters. State and local government activity decelerated in Q3 and had a slightly negative impact on GDP growth. State and local investment fell in the quarter, after showing signs of an uptick earlier in the year. Employment growth at this level of government, however, has been trending upwards in recent quarters, continuing a slow-but-steady recovery from post-2010 lows.
Tax and transfer policies have added to the pace of growth since the beginning of 2019, driven mostly by increases in federal social welfare and tax credit payments. Because the FIM assumes that taxes and transfers affect household spending with a lag, those payments are expected to continue to boost the FIM into 2020.
In conclusion, the World Bank 2020 Global Economic Prospects cites three highlights for investors to focus on. The world economy is poised for a modest rebound this year, but this outlook is fragile. Emerging, developing economy growth is expected to accelerate in 2020 as some emerging economies recover from periods of stress. And, a rise in debt and a slowdown in productivity pose challenges for policymakers. While the 2020 World Bank Global Economic Prospects envisions an upward path that could be upended, it infers is a degree of uncertainty around the forecast given unpredictability around trade and other policies.
Timothy P. Speiss
Personal Wealth Advisors Group