Why One Bank ‘Remains Resolutely Pessimistic’ About 2020

This isn’t exactly surprising, but it’s notable nevertheless.

SocGen’s outlook for the global economy (and especially for the US economy) in 2020 is overtly bearish compared to consensus and certainly compared to more upbeat outlooks from, for example, Goldman.

In their year-ahead multi-asset strategy piece (released on Tuesday), the bank references their economists’ 2020 outlook. In that piece, one finds a section that carries this title: “We remain resolutely pessimistic on the 2020 growth outlook”.

It’s not unusual for SocGen to sound a somewhat dour tone, and it should definitely be emphasized that the bank sees a synchronized upturn in 2021. Also, they do not call for a deep downturn in the US in 2020. And yet, they do see a mild recession stateside next year (in Q2 and Q3) and have stuck with that call for a while now.

To be clear, the likes of the IMF, the OECD and the WTO are pessimistic too, but SocGen’s estimates are remarkably far afield from consensus and they are more than open about it.

“Our 2020 growth forecasts are below the consensus forecasts for practically all the economies we cover”, the bank writes. Indeed, one of the reasons their global GDP forecast shows an aggregate uptick at all (from 3% to 3.1% using PPP weights) appears to be tied to their use of IMF estimates for economies they don’t cover. Some of those forecasts (for developing economies) suggest “significant rebounds in growth which offset the slowdown in the developed economies”, the bank writes. Have a look at this:

(SocGen)

Compare those estimates (especially on the US) to Goldman’s:

(Goldman)

SocGen goes on to note the obvious, which is that “the flavour of our analysis is best captured in our forecasts of the developed economies [and] most importantly, our US forecast [which is] 1.1pp below consensus at just 0.7%, reflecting our expectation of a mild recession around mid-2020”.

That assumption has ripple effects across the bank’s other forecasts, including and especially in LatAm. For Europe, the bank is marginally below consensus and the same goes for China and down under.

So, what gives with the US recession call? Well, as we alluded to earlier on Tuesday (and on several occasions last week), the bank is concerned about a profit squeeze.

After reminding everyone that their call for a shallow recession in the US next year is no longer so “off beat”, the bank talks at length about weakness in a variety of indicators (especially those in business sentiment and manufacturing), before spending a bit of time on what causes recessions. To wit:

Many things can cause recessions. The classic examples are a sharp tightening of monetary policy (usually in response to high inflation or strong downward pressure in the currency), sudden fiscal policy tightening (to address excessive deficits, for example), or an exogenous price shock such as the oil crisis in the 1970s. Or, as was the case in the Great Recession, a sudden collapse in wealth owing to a sharp drop in asset prices, which is usually followed by a credit contraction (“Minsky Moment”), and the list goes on.

Spoiler alert, SocGen isn’t really worried about any of that. Instead, they’re worried about corporate bottom lines getting crimped.

The third quarter marked the first YoY decline in US corporate earnings since 2016, and one worry going into 2020 is that with buybacks set to decelerate and a combination of higher input prices (think: tariffs) and higher labor costs (think: rising wages in a tight labor market) set to squeeze margins, too much of the burden for lifting stocks will fall on multiple expansion.

When it comes to the broader economy, SocGen writes that “with labour productivity continuing to grow at a sub-average rate of around 1.7% and wage growth gradually picking up, unit labour costs growth has jumped to its highest rate in five years”.

(SocGen)

This is a problem, because unlike 2014 and 2012, higher unit labor cost growth looks like a trend rather than a short-lived spike, and as such, can’t properly be written off to idiosyncratic factors. “In other words”, the bank cautions, “this time accelerated wage cost growth is occurring as a result of labour market tightness, which is not a short-term phenomenon”.

And so, SocGen expects to see the “steady profit erosion that is now in its fourth year” continue apace.

Needless to say, a recession in Q2 and Q3 is just about the last thing Donald Trump needs headed into an election in which his fate with anyone who doesn’t count themselves among his hardcore base will rest with the relative health of the economy. The president continues to insist he’s ushered in a veritable economic renaissance, despite growth having now decelerated to an annualized clip of just 1.9%.

There’s more to SocGen’s take than what’s excerpted and discussed above, but suffice to say that even as more and more pros are coming around to the possibility of a US recession in 2020, the bank’s take remains out of consensus.

That means if their call plays out, they’re going to look like geniuses – and maybe even “very stable” ones, at that.