David Rosenberg estimates the chances of the U.S. economy slipping into recession in 2020 at about 50 per cent – marking a modest improvement in his outlook, although the economist remains far from sunny.
“All I am saying is that my conviction level has changed. It hasn’t gone away entirely. From 80-per-cent odds, I now see the probability for this year closer to a coin-toss,” Mr. Rosenberg, head of Rosenberg Research and Associates, said in a note Tuesday.
That puts Mr. Rosenberg, who was previously the chief strategist and economist at Gluskin Sheff + Associates, firmly in the bearish camp at a time when investors appear to be upbeat.
Despite Tuesday’s stock market downturn related to an outbreak of a SARS-like coronavirus in China, the U.S. stock market is close to record highs and the Dow Jones Industrial Average needs to rise just 2.8 per cent to hit 30,000.
Mr. Rosenberg still sees threats to the economy. A contraction in private fixed investment, which has already happened in two consecutive quarters, occurs rarely outside of a recession, making it a big threat.
“The important note is that the U.S. economy, and indeed the global economy, remains very fragile,” he said, pointing to tentative-looking Chinese growth, essentially zero-growth in mainland Europe and a weak British economy.
He also believes that there is still an 80-per-cent chance that the Canadian economy is headed for recession, if it isn’t there already.
“The best that can be said is that global economic forecasts have stopped going down, and the [Organization for Economic Co-operation and Development] leading indicator has steadied at its lowest level since the 2009 Great Recession. Small consolation, but consolation it is nonetheless,” Mr. Rosenberg said.
But he underscored two developments that could reinforce U.S. economic activity this year, which he hadn’t factored into his previous recession odds.
One, this year will likely bring fiscal stimulus after bipartisan support in Washington last year lifted the U.S. budget ceiling and pushed back the next spending debate past the 2020 presidential election.
“The spending taps are being turned on, and the move by the Treasury to resurrect the 20-year bond as an added funding tool attests to that. And it is one reason we have been and remain bullish on the Defence sector,” Mr. Rosenberg said.
Two, the recent “Phase One” trade deal between the United States and China means that China will be buying more U.S. soybeans and other exports, and U.S. businesses may be more inclined to invest in growth opportunities now that trade-related risks are subsiding.
Mr. Rosenberg estimates that the trade deal alone could add half a percentage point to U.S. gross domestic product in 2020, while increased government spending could add another half of a percentage point.
Combined, that’s enough to boost U.S GDP growth to a range between 1 per cent and 1.5 per cent – and lower Mr. Rosenberg’s odds of a recession this year to 50 per cent.
On Monday, the International Monetary Fund updated its economic forecasts after estimating that the global economy expanded just 2.9 per cent in 2019.
The IMF lowered its growth estimates slightly, to 3.3 per cent in 2020 and 3.4 per cent in 2021, down 0.1 and 0.2 of a percentage point, respectively. But the agency said that easing trade tensions and interest rate cuts by a number of central banks have reduced economic risks.
But the stock market on Tuesday appeared to be weighing other matters: A deadly outbreak of the coronavirus in Wuhan, China, has raised concerns about a possible pandemic during the busy travel season of the Lunar New Year. A man in Washington State, who had recently travelled to China, was diagnosed with the virus, intensifying concerns about the outbreak.
The S&P 500 was down 0.3 per cent in Tuesday trading. The S&P/TSX Composite Index slipped 0.1 per cent. Airline stocks were among the biggest casualties. Air Canada shares fell 4.5 per cent and Delta Air Lines Inc. declined 2.7 per cent.
From December: Canada’s most famous economist thinks there’s an 80 per cent chance of recession next year - here’s how you should invest
David Berman