Friday, 10 July 2015

Translating the IMF's latest global growth projections

Macroeconomic musings at the moment are dominated by China and Greece and the update to global growth issued by the IMF yesterday could easily be missed despite some fascinating forecast evolutions as shown below including a quite large downgrade to US, Japanese and various emerging market growth hopes BUT a Russian growth increase (still FY15 growth contraction however) and both Italy/Spain upgraded too.


So using my favourite company specific tactic of finding extra insight from the conference call with company management...here are my highlights from the press conference (all emphasis is mine)...plus a translation of what I believe the IMF is trying to say (which is completely my view of course).

On Greece 
'I’m not sure the word “elephant” is actually the right one as dramatic as the events in Greece are...only represents less than 2 percent of the euro zone GDP, less than one-half of a percent of world GDP...There is still I think a larger lesson to be drawn, which is that the post-crisis world is a world of high debt. And it doesn’t take much. It just takes a bad shock for the dynamics to go wrong'

Translation - this is why the IMF says that Greek debt needs to be restructured: you are getting nowhere fast otherwise.

'Moderate growth continues' 
'What you have is that moderate growth continues. You have an improving recovery in advanced economies, and you have the forecast slowdown in emerging market and low income countries. As you know the forecast that we have is 3.3 percent for 2015 for this year and 3.8 percent for next year. This is where the word I think “moderate” comes in and captures more or less the nature of that number'.

Translation - it is not the 1980s or 1990s anymore, that is clear to see. Structural reform or accept lower growth, it is as simple as that.

US fundamentals are fine 
'The main unexpected development was clearly the negative growth rate in the U.S. in the first quarter... this was an accident and the rest of the year should not be very much affected. In short I think the fundamentals of the U.S. economy are very strong'.

Translation - we believe Q1's negative growth was an anomaly...

'Recovery is getting traction' (in some of the advanced economies)
'if you look at other advanced economies, Europe and the euro zone in particular is doing better. The recovery is getting traction'.

Translation - there is some growth, it is still below trend, but at least it is some growth.

Japan - 'still there is growth'
'In Japan there was very good news, very good numbers in the first quarter, but we still think that growth is going to be a bit weaker over the year than we anticipated three months ago because of slightly more fiscal adjustment, slightly weaker consumption, but still there is growth in Japan' 

Translation - we are so excited growth is positive in Japan that we will ignore that it is being downgraded

China - 'unchanged...with a bit more uncertainty' 
'We have left unchanged our forecast for China. Our forecast is a bit lower than some others at 6.8 percent for 2015 with a bit more uncertainty around the forecast than in April'.

'...the role of stock markets in China, the capitalization of stock markets relative to GDP, is much smaller than say in the U.S. so movements in the stock market have less effect.  

our forecast for growth for China as I said this year is 6.8 percent, next year 6.3 percent, and then 6 percent in 2017'

Translation - growth slowing, we hope the stock market volatility has no effect and fingers crossed!

Brazil - 'we now forecast a recession'
'...we’ve revised Brazil’s growth down. We now forecast a recession. We already did, but the larger recession, -1.5 percent. What’s happening in Brazil is a combination of two forces. The first one is low business and consumer confidence to start, leading to low spending, low investment'.

Brazil: 'we’re predicting positive growth in 2016'
'We think we need to give time to the fiscal adjustment plan to set roots and exercise its positive effects on confidence in the Brazilian economy more generally...this is why we’re predicting positive growth in 2016. These factors should work in the right direction, but this year will be tough'

Translation - recession alert, recession alert.  They had better listen to what we suggest if they want to recover in 2016/17

Russia - 'tough year'
'The other country where the numbers are very bad is in Russia. We now forecast Russia’s growth to be negative at -3.4 percent. It’s a bit better than the forecast in April...a very large negative number that will lead to a very tough year in Russia'.

Translation - Russia remains messy

Deflation - 'the risk of deflation...substantially decreased'
'the risk of deflation, which is the risk that we had emphasized in previous press conferences. It has not disappeared, but substantially decreased'. 

Translation - we never really believed in deflation in any case.  Recall what we said about debt above?  Well a bit of inflation does wonders and with all this global money printing...

'Dangers of high debt'
'Greece and Puerto Rico, to take another example, are reminders of the dangers of high debt. So this would be the first issue that I see as relevant for quite a bit of time to come'

Translation - anyone who does not structurally reform like we suggest is asking for trouble

Challenges for the emerging markets 
'the slowdown in growth; not in advanced economies but in emerging market economies. And what’s behind it? It is striking that for the last five years we have each revised the growth rate of Latin American down. And the question is should we read into this. I think we should read that the period of higher growth, which came before the crisis, was probably larger due to the increasing commodity prices which affected most of these countries, benefited most of these countries, and to very lax international financial conditions. And it probably could not go on, and these countries need to adapt to a new environment in which commodity prices are either flat or have decreased the number of cases, and where the financial conditions looking forward are going to be tighter as the Fed exists and eventually other major central banks do the same. And so there is clearly a challenge for these economies to adjust to this new environment'

Translation - without that prop of higher commodity prices, suddenly all you guys who thought you were smart emerging market investors are looking rather silly aren't you?  Latam needs to listen to us more!

On US interest rate profile - 'for the moment, monetary policy should continue to be accommodating'
'I am always amazed by the amount of time spent by people trying to guess whether it is going to be this time or next time. I don’t think it is very important. I think what is important from our point of view is the U.S. recovery is very strong. We are not very far from the natural rate. Inflation is still too low. For the moment, monetary policy should continue to be accommodating, and as things continue, at some stage it will be time to change'.

Translation - you know we just cut US growth?  Well hence don't be too aggressive in raising rates then...

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