Geopolitics ranked top risk for pension funds: survey

Investors are waiting for some of the conflicts causing global uncertainty to be resolved. But will they get their wish in 2020?

“We’re entering the year, the decade, on pretty unstable footing,” said Dawn Desjardins, vice-president and deputy chief economist at the Royal Bank of Canada, during the keynote session at the Canadian Investment Review’s 2019 Defined Benefit Investment Forum in Toronto on Dec. 6. “[There’s] lots of uncertainty out there — 2019 marked a year where we saw this continual ramping up of uncertainty and anxiety.”

Read: Will Canadian capital markets disappoint investors in 2020?

Brexit and trade relations between the U.S. and China have been the heavy hitters behind that anxiety, she said. And it remains unclear day-to-day how either situation will be resolved, but in the interest of establishing a base case, it’s unlikely the U.S. and China will find themselves in an all-out trade war in the coming year.

As for Brexit, the U.K. will start to establish some kind of relationship framework in 2020, but it’s unlikely to be totally solidified by year end, said Desjardins. “Against that back drop, we have seen some pretty big repercussions for the global economy. We’re seeing trade volumes decline over the past couple of quarters. That’s the first decline in trade volumes we’ve seen since the great recession.”

Globally, industrial production has come to a grinding halt, with the manufacturing sector shifting into contractionary mode, she added. The services sector is showing some signs of slowing, but has yet to be dragged down into negative territory.

“Certainly from the labour market point of view, that is the engine of growth,” she said. “We continue to see job creation and that’s a big fundamental and that’s what’s really keeping the global economy afloat.”

Read: What headwinds do stocks face going into 2020?

Overall, global growth is slowing, but actions on the part of central banks will likely be sufficient to provide some momentum in 2020, added Desjardins. “This is also based on the assumption of some tamping down of the uncertainty that we’re operating in as we enter the year.”

Meanwhile, the European Central Bank is focused on maintaining stimulus, with an eye towards the utter lack of inflation in the region, she said.

With all of this trepidation swirling through the world’s largest economies, the question remains whether it will be enough to send them into recession. “We’ve seen two quarters of pullback in investment activity by U.S. businesses and that’s really the first time we’ve seen this six-month period of contraction in investment since three years ago,” said Desjardins.

The U.S. consumer is expected to be the driver of economic expansion next year, she added, noting certain factors are supporting the American consumer, including very low unemployment and decent wage growth. As well, the average U.S. household balance sheet has been improving since the global financial crisis. “From the perspective of having the ability to spend, we do think the U.S. consumer is in good health.”

Read: Global institutional investors sober as markets rally: survey

As for Canadian politics, Desjardins said some fiscal stimulus is likely, but it remains to be seen how the Liberal Party will function in its new minority government.

Ultimately, both Canada and the U.S. should make it through the year without a recession, she said. “Generally speaking, we’re just not seeing anything in the indicators we track that says we’re on the cusp of recession.”

This article originally appeared on Benefits Canada‘s companion site, the Canadian Investment Review.