On April 11, the International Monetary Fund (IMF) issued its semi-annual World Economic Outlook, which forecasted global GDP growth of around 4.5% in both 2011 and 2012. This prediction is in line with the 4+% estimate in our January 4 and April 4 Marietta Outlooks, and supports our view that the recent dramatic events in Japan and the Middle East will have only a modest negative impact on the global economic expansion.
The existence of a growth gap between the leading emerging economies and the advanced economies has been a prominent feature of Marietta’s economic outlook and investment strategy since the inception of the global economic recovery in early 2009. More recently this was the subject of our October 21, 2010 blog Global Economic Growth: The Rabbits and the Tortoises. The IMF shares our view that this gap will extend for the foreseeable future. We concur with the IMF’s 2011 and 2012 GDP projections of 9.6% and 9.5% for China, 8.2% and 7.8% for India, and 4.5% and 4.1% for Brazil. In sharp contrast, the IMF forecasted significantly lower growth for the advanced economies of the Euro Area (1.6% and 1.8%), Japan (1.4% and 2.1%), and the U.S. (2.8% and 2.9%).
For the past two years, Marietta’s central investment thesis has been that a multi-year economic expansion would give rise to a multi-year bull market in global stocks, and the best returns would be provided by the stocks of companies that participate heavily in those economies where growth is highest and most assured. The latest forecast by the IMF buttresses our conviction.
Especially noteworthy is the IMF’s discussion of what needs to be watched and what could go wrong. Highest on their list are rising inflation trends exacerbated by soaring industrial and agricultural commodity prices. IMF Chief Economist Olivier Blanchard asserts that at this point “they appear unlikely to derail the recovery,” but adds that inflation pressure is likely to build further as growing production comes up against capacity constraints, with large food and energy price increases raising pressure for higher wages (IMF Survey Magazine, 4/11/2011). The response of central banks to combat inflation with restrictive policies will likely slow economic growth. In other words, there is a growing threat of stagflation. We at Marietta will be watching closely.