The immediate global economic outlook remains weak but cycle analysis suggests that 2020 will be a recovery year.

Growth, indeed, could be strong in H2 2020. The stockbuilding and business investment cycles are expected to bottom by Q2 2020 at the latest, while the upswing in the longer-term housing cycle should regain momentum in response to current falls in mortgage rates and as the drag from the other cycles is lifted.

This optimistic scenario requires confirmation from a rise in global six-month real narrow money growth – currently still below 2% – to well above the 3% level judged here to be a necessary condition for an economic recovery. This could occur in late 2019 or early next year.

The suggestion that US housing will be a source of economic strength next year is supported by the latest Fed senior loan officer survey, showing the net percentage of respondents reporting stronger mortgage demand surging to a 16-year high – see chart*. The survey was conducted in July before the recent further fall in Treasury yields, which has yet to feed through to mortgage rates.

Economists were too optimistic about 2019 global economic prospects but many are now warning of a recession in 2020-21. Monetary and cycle analysis, by contrast, indicates that economic weakness will reach a maximum during H2 2019. Assuming that monetary trends continue to improve, investors could consider using “risk-off” market moves to reduce defensive positioning and increase exposure to 2020 recovery plays.

*The series shown is a simple average across loan categories.