Trade truce unlikely in 2020 but US recession fears recede

The US-China trade war is unlikely to see a permanent truce over the coming year, and while concerns have eased over a US recession, an economic rebound is also not expected any time soon, according to a Reuters poll of economists.

The November 8-13 Reuters poll of over 100 economists showed a quarter-point Federal Reserve interest-rate cut would come in the third quarter next year; a poll three weeks ago had predicted a cut early next year.

That shift in expectations came after Fed Chairman Jerome Powell indicated that while the central bank was cautious about the trade conflict and slowing growth, it would now pause after cutting rates three times here this year to 1.50-1.75%.

While most major central banks are concerned about the ongoing trade dispute, stocks on Wall Street have touched record highs over the past few months on hopes for a resolution between Washington and Beijing.

But economists do not share the same view. While the median probability of a recession for the coming year fell to 25% from 35% last month, the economic growth outlook remained modest.

Over three-quarters of 53 economists who answered an additional question said a permanent truce in the US-China trade war was unlikely over the coming year.

"The global economic backdrop is going to remain tough, the US dollar is going to remain relatively firm and we are less positive on the trade story than perhaps the market is currently pricing. The talk of (tariff) rollbacks and stuff like that – we are not as certain that will actually come through," said James Knightley, chief international economist at ING.

"So, we think there is still scope for a weaker growth environment – with inflation being pretty benign - to give the Fed the opportunity to come in with a little bit more stimulus."

President Donald Trump said on Friday he had not agreed here to rollbacks of US tariffs sought by China. Officials from both countries on Thursday said China and the United States had agreed to roll back tariffs on each others' goods in a "phase one" trade deal.

The US economy is forecast to have expanded at an annualized pace of 1.9% in the July-Sept period, slightly down from 2.0% in the second quarter. Growth is expected to hover around that rate in each quarter through to the second half of 2021, according to economists.

Over 80% of 52 respondents to an additional question said the Fed had done enough to delay the next recession but that already-modest growth forecasts were largely left unchanged.

"I think in terms of the risks, they are probably still tilted toward the Fed maybe cutting rates once more at some point in the coming months if growth slows further, certainly if there is some renewed breakdown in trade talks," said Andrew Hunter, senior US economist at Capital Economics.

"But barring that, it does look like they have done enough to avert a recession. In our baseline forecast, there is growth slowing a little bit further over the next couple of quarters but starting to recover next year."

Economists were almost evenly split about whether there would be any interest rate cuts.

While the median showed the Fed would next trim rates in the third quarter of 2020, taking the fed funds rate to 1.25%-1.50%, only a small majority of economists forecast at least one cut.

A strong minority - over 46% of 93 economists - expected rates to be unchanged until at least 2021, compared to 31% of 84 economists in October, in line with interest rate futures.

Asked about the Fed's next interest rate move, 55 of 75 economists said it would be a cut.

The Fed's preferred measure of inflation - the change in the core personal consumption expenditures price index - is expected to be 2.0% in the first quarter and then to remain at 1.9% at least until the second quarter of 2021.

"Limited inflation pressure will allow the Federal Reserve to err on the side of accommodation. The Federal Open Market Committee will probably remain on the sidelines for the next several months," said Michael Moran, chief economist at Daiwa Capital Markets.

"However, if momentum begins to fade as we expect, the Fed will probably make an effort to sustain the expansion."