Friday, April 27, 2012

IMF Supports Marietta Global Growth Forecast

In an encouraging update to its January World Economic Outlook, the International Monetary Fund (IMF) stated last week that “global prospects are strengthening again…” and boosted its 2012 global GDP growth estimate from 3.3 to 3.5%.  In its upbeat assessment, this prestigious and influential organization rejected worrisome gloomy predictions of another “soft patch” in the U.S., of sovereign debt crises and austerity budgets in Europe triggering a descent into a serious recession, and of economic hard landings in China and other leading emerging economies.  The expected gradual reacceleration in growth is attributed to “improved financial conditions, accommodative monetary policies, a similar pace of fiscal tightening as in 2011, and special factors (reconstruction in Japan and Thailand).”

Further, the IMF raised its forecast for 2013 global growth to 4.1%, and projected accelerated growth increase in the U.S. (from 2.1 to +2.4%), the Euro Area (from -0.3 to +0.9%), and the major emerging countries (from 5.7 to +6.0%).  We note that this positive forecast agrees with Marietta’s Outlooks since mid-2009 that the global economy had entered a multiyear global expansion of about 4% per year led by the emerging economies with the U.S., Europe, and Japan trailing with supportive albeit subpar GDP growth (see, e.g., our April 5, 2010 Outlook).

The IMF economists are hardly pollyannaish, and emphasize that “…the global economy remains unusually vulnerable.”  At the top of their list of risks is renewed escalation of the euro area crisis followed by concern that geopolitical developments in the Mid-East will trigger another spike in oil and gasoline prices.  They acknowledge that their forecasts assume that “spillovers from the euro area are likely to have limited effects on economic activity [elsewhere] for as long as the euro area crisis is contained” and that the price of oil will average “about $110” per barrel.  We at Marietta are also well aware of these and other risks, but we continue to believe that future investment prospects remain.

Although the financial media is preoccupied with downside risks, the IMF also discusses upside risks: growth might turn out stronger than projected if there is more rapid recovery in the United States and the euro area, thanks to a stronger policy response to the euro area crisis and improved confidence, and if the geopolitical tensions recede and the risk premium in oil prices dissipates. Greater confidence and waning supply-side disruptions could also foster a more forceful rebound in global durables consumption and investment, helped by generally healthy corporate balance sheets and less costly capital.

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