Why the long face? The global economy is growing! Photo credit: Bloomberg/Contributor.
“Big Supranational Sees Global Growth Pickup, Recession Risk Less Than 1%: Go World!” That would be the headline we’d plop on a report of the IMF’s updated global economic outlook, which forecasts a repeat of 2013’s 3.3% global growth this year and acceleration to 3.8% next year. However, this forecast happens to be a bit lower than the IMF’s last missive. And it’s titled “World Economic Outlook: Legacies, Clouds, Uncertainties.” And it’s published by an outfit whose leader says the world economy is entering the “new mediocre.” So the common interpretation runs the gamut from pretty blah to dire. But the IMF’s downward-revised forecast shouldn’t dampen investors’ view of a growing global economy—dour spin doesn’t equal dour reality.
The finer points of the IMF’s outlook aren’t new. They see the US accelerating, the UK holding firm, the eurozone weakening and maybe deflating, Japan suffering through the sales tax hike aftermath and Emerging Markets all over the map. Now, raise your hand if you were shocked by any of this. Anyone? Bueller? That’s what we thought. The IMF is simply displaying a propensity to read the front page of The Wall Street Journal, taking recent trends and headlines and extrapolating them forward. Contraction in Italy and Brazil, faster growth in the US, steady growth rate in the UK, slower growth in France and Germany—you get the drift.
The “less than one percent chance of a global recession” thing is nice, though perhaps understated. The IMF defines recession as global growth falling below 2% annually, based on purchasing power parity-weighted global GDP—basically an attempt to adjust for how much a dollar gets you in one country vs. another. It’s all a bit skewed, but that’s a topic for another day. We’re a tad skeptical stocks would care much if the world were growing 2% a year, especially if that 2% growth was broad-based. Rising demand is rising demand. The primary forecast, which the IMF and media could have trumpeted, is there is a better than 99% chance of a-ok growth.
But the IMF chose a dreary take, playing up the minuses rather than the plusses, highlighting 10 big risks to their forecast, and including a Very Special Section on global “imbalances.” Meanwhile, their director is on a press tour proclaiming the global economy may be stuck on a “new mediocre” growth path, requiring more government assistance. And the report spends a good 40 pages arguing for a massive infrastructure spending push. Which just seems like kind of an agenda to us. The IMF has been banging this drum for a while now. Call us skeptics, but we question whether this would really be the panacea the IMF thinks. Usually the time for fiscal stimulus of this sort is at the bottom of a recession or in the dawn of the recovery, to jumpstart demand and get capital moving. A stimulus push five-plus years after a recession, at a time when most of the world has been in recovery or expansion for years, just seems odd.
Anyway. The IMF’s sad spin was good enough to roil sentiment, but we wouldn’t read much into that. The big risks highlighted in the report are largely the same perpetually rehashed fears stocks have dealt with for years. Like stalling demand and technological development (aka “secular stagnation”), a disruption in oil supply due to Middle Eastern conflict, a Chinese hard landing, the end of quantitative easing, rate hikes, geopolitics and some other familiar worries. They doubled down Wednesday, with their “Global Financial Stability Report” claiming rising rates could cause a shadow banking implosion, wiping $3.8 trillion off global GDP. We won’t bore you with a serial debunking of each highlighted risk—see here, here, here, here, here, here and here. (Or if you prefer snippets: The shale boom and continued advances in robotics and microprocessing should put secular stagnation to bed, China is growing slower but not crashing, rising US and Saudi oil production are a big buffer against potential drops in Iraq or wherever, quantitative easing was bad not good, rate hikes aren’t automatically bearish or contractionary and regional conflicts have never ended bull markets. Oh and stocks can do fine amid slow growth.)
But let’s talk about that $3.8 trillion timebomb for a second here. So the theory is when rates rise, investors will freak, firesell all the high-yield, Emerging Markets, African and peripheral eurozone bonds they allegedly yield-chased their way into, wrecking the banking and shadow banking systems. To the tune of nearly $4 trillion in losses. Which sounds bad! Only, we had rising rates for a good chunk of 2013, and this bloodbath didn’t happen. Banks didn’t take massive losses. There was no firesale. It was all just plain old normal volatility. If rates tick up—and they seem likelier to go up than down—we’ll probably have more volatility, because this is how bond markets work. But to assume worse is to ignore the many, many other reasons investors would still want to hold all these bonds. Like the fact US corporate default risk is way low, even in the high-yield arena. And the fact yields still outstrip US Treasurys, making these assets somewhat less vulnerable to rising rates. And the fact sovereign issuers are in pretty darned good shape, too, which is sort of how they were able to issue these bonds in the first place.
This isn’t the first time the IMF has issued such dire warnings. But frankly, their track record isn’t great. Last year, they claimed Japanese PM Shinzo Abe’s economic growth program (Abenomics) could create instability if fiscal and structural reforms weren’t fully implemented—well, said reforms haven’t been implemented, and the world is turning. October 2012’s GFSR said a possible breakup of the eurozone posed the biggest threat to stability. And hey, it was! But the eurozone still exists.
Now we aren’t suggesting risks don’t exist—they always do—but everything the IMF cites has been widely discussed for years. These are bricks in the wall of worry, and the likelihood they contain any whopping surprises is slim. The only takeaway we see in the IMF’s recent reports reveals a world that’s growing just fine and looks poised to continue—providing a solid economic backdrop for the bull to keep on running.
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 By the way, in case the IMF didn’t notice, oil prices are down by more than 20% from a June high because the world is more or less awash in oil.