Strategy

Mark Your Calendars for a 2020 Recession


On a recent webcast, economist Leo Abruzzese discussed the trends and challenges shaping corporate growth, employment, trade, and the general operating environment amid political and market volatility around the world.

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The U.S. and global economies are expected to continue their current growth patterns for the next two years, with a mild recession expected in 2020, according to the Economist Intelligence Unit (EIU).

“We’re not quite in a boom right now – we’re in ‘good-ish’ times now,” said Leo Abruzzese, Global Forecasting Director for the EIU, during a KPMG Audit Committee Institute webcast.

“Keep an eye on your costs because this isn’t going to last. This [economy] will last about 20 more months, and you have to be in a position where you haven’t overextended your costs because by 2020, we’re going to come off the boil a bit. Enjoy these good times while they last now, but they’re not going to last forever.”

Abruzzese said overall trends remain favorable as the U.S. and global economies maintain their recovery from the depths of the 2009 recession. While today’s U.S. growth rates remain below those seen during the peak of the mid-1990s, the steady improvements seen in recent quarters are expected to continue through 2018 and 2019.

“We expect growth to be solid throughout 2018,” Abruzzese said. “We think GDP growth will remain at around 2.9 percent. We won’t get back to the pre-recession growth rates, but compared to where we’ve been, current growth isn’t bad. Business conditions run in cycles, and we’re long into this favorable cycle.”

Abruzzese cited a number of economic metrics that remain favorable for U.S. businesses. For instance, consumer confidence in 2017 improved to the highest level 2000, according to the University of Michigan Index of Consumer Sentiment.

“That’s good news for any businesses that rely on consumer spending,” Abruzzese said.

Similarly, unemployment remains at an 18-year low after an unparalleled streak of 87 consecutive quarters of jobs growth since the 2008 downturn. If current trends continue, there’s potential for the U.S. to break the 3.7 percent record low for unemployment.

In addition, U.S. tax reform legislation is likely to provide a small boost to corporate spending and the broader economy. This effect will probably be modest, Abruzzese predicted, because so few companies were paying scheduled tax rates. Although the base corporate rate is falling from 35 to 21 percent, tax management strategies by companies will result in a decline in effective tax rates from about 18 to 14 percent.

Despite the good news, however, there are a number of less-optimistic economic indicators. For businesses, recent increases in interest rates, coupled with additional rate hikes expected this year, will increase the cost of borrowing and investment.

Similarly, consumer confidence may be affected negatively by relatively small growth in wages pay because increases for U.S. workers followed trends in previous low-unemployment periods. Recent media reports about salary hikes following the tax reform legislation, for instance, have yet to spread through the broader business community.

“We’re near the end of the longest business cycle on record and the labor market remains tight,” Abruzzese said. “As inflation increases and approaches 2 percent, the [U.S. Federal Reserve Bank] will react by slowing the economy. In 2020, we expect we’ll see a mild recession as overall growth hits a slow patch, perhaps in the middle two quarters. We think the economy will recede a bit, but it won’t be what we saw in 2008.”

 

Correction: An earlier version of this article stated that Leo Abruzzese was a KPMG employee. He is not. He is the Global Forecasting Director for the EIU.