IMF Raises Global Outlook as Advanced Nations Accelerate
Comment of the Day

January 21 2014

Commentary by David Fuller

IMF Raises Global Outlook as Advanced Nations Accelerate

Here is the opening of this topical report from Bloomberg:

The International Monetary Fundraised its forecast for global growth this year as expansions in the U.S. and U.K. accelerate, and urged advanced economies to maintain monetary accommodation to strengthen the recovery.

The global economy will grow 3.7 percent this year, compared with an October estimate of 3.6 percent, the IMF said in revisions to its World Economic Outlook released inWashington today. U.S. gross domestic product will expand 2.8 percent, compared with 2.6 percent; Japan will gain 1.7 percent versus 1.2 percent; and the U.K. will increase 2.4 percent from 1.9 percent, the reportshowed.

“In advanced economies, output gaps generally remain large and, given the risks, the monetary policy stance should stay accommodative while fiscal consolidation continues,” the Washington-based organization said in the report. “In many emerging market and developing economies, stronger external demand from advanced economies will lift growth, although domestic weaknesses remain a concern.”

David Fuller's view

There are no surprises in this consensus view from the IMF.  A gradual improvement in GDP growth would be untroubling for equity investors in most markets, not least because monetary policy would remain generally accommodative, despite QE tapering in the USA.

Risks are more likely to rise if global GDP growth either clearly outperforms or underperforms the IMF’s projections.  

Slower economic recovery for any reason would create more uncertainty among investors and also within business communities.  It would result in additional disinflationary and deflationary pressures within the global economy.  Corporate profits would be vulnerable and there would be little justification for p/e ratio expansion.

Clearly faster economic growth than the IMF is currently forecasting, including a significant recovery by China, would revive Asia’s growth and help corporate profits for most companies.  However, it would make it more difficult for central banks to prevent longer-term interest rates from rising.  Additionally, it would also lead to generally higher prices for industrial commodities. 

Assuming no major exogenous shocks, I think there is more upside scope than downside risk for global GDP growth in the years ahead.  However, this will only become a problem for investors in 2014 if the accommodative monetary tailwind continues to push valuations higher.

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