The global economy has been facing its most challenging year in over a decade.

That being said, policymakers still have options, but can they use them effectively?

Global economic forecasts have changed throughout the trade war uncertainties; overall revisions show that global economic growth is expected to grow by just 2.3 per cent in 2020.

This weakness is not enough to be called a recession and it's certainly not comparable to the financial crisis but it does represent a material slowdown that could leave the world more vulnerable to adverse shocks.

US - China trade war creating uncertainty 

Several factors make the global outlook more challenging than normal.

Debt, demographics and minimal productivity growth mean the global backdrop is weak.

The trade war between the U.S and China has led to rising uncertainty and helped push global trade growth into negative territory for the first time since the global financial crisis.

It's not surprising that the worst-hit countries have been open economies with large manufacturing bases, like Europe and Japan.

To date, this has been very much a manufacturing-led downturn.

The good news is that consumer and capital spending have so far held up well, even in Europe.

The bad news is that persistent weakness in manufacturing and trade could eventually spill over into investment and jobs, dragging overall growth lower.

With trade tension here to stay and a possible U.S-led currency war on the horizon, it's hard to see a catalyst for a speedy turnaround in manufacturing.

Monetary Policy in a Negative Rate Environment

As ever, the first line of defence against a protracted slowdown in global growth is monetary policy.

In this respect, it's comforting to see easing underway in China, the U.S and now the Euro area, and more is expected over the coming year.

While pushing interest rates even lower and inflating balance sheets even further may give a short-term lift to asset prices, it's much less clear that this will have a material, positive impact on growth.

That's a particular concern in Europe and Japan, where the rate structure is already negative and monetary policy may already be ineffective.

The outlook is challenging

With all this in mind where does it leave markets? 

Since contracting sharply during the financial crisis, the global economy has enjoyed 10 years of constant growth.

That said a combination of weak global growth, ongoing concerns about the future of the global trading system, declining policy effectiveness and lingering populist risks means that 2020 is likely to be the most challenging year for the global economy since the financial crisis.

So, is there anything that could contribute to the global economy and lead to a more positive outcome? There are three channels on the horizon that could possibly prompt better-than-expected growth next year.

These are an end to the trade war, shockingly effective monetary policy and fiscal policy riding to the rescue.

That being said, skepticism surrounds all three scenarios. As an example, the trade war could be seen as being a manifestation of two key secular trends - populism and geopolitical conflict between China and the West - rather than something that can be solved by the end of Donald Trump's presidency.

Also, while the thought of the burden of supporting growth and inflation would eventually shift to fiscal policy, it is doubtful that the transition will be fast enough or broad enough to make a material difference to 2020 growth. 

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