The International Monetary Fund (IMF) is the real deal. It is the global institution whose core mission is to monitor economic activity, policies and financial markets around the world and to offer support to economies in trouble. The IMF is highly capable and credible, and its analysis is data driven.
The IMF, in its semi-annual outlook published last week, is projecting global growth of 3.7% for 2018 and 2019, which is 0.2% lower than the forecast from April. Growth is turning over. The United States is still a bright spot due to extraordinary fiscal stimulus (tax cuts), yet U.S. forecasts are also weakening from 2018 to 2019 due to recently announced trade measures. In the euro area, including the United Kingdom, growth is expected to slow further to below 2%. Growth in many energy exporters has been lifted by higher oil prices, though growth was revised down for Argentina, Brazil, Iran and Turkey, reflecting tighter financial conditions, geopolitical tensions and higher oil import bills. China and a number of other Asian economies are also projected to experience somewhat weaker growth by 2019 due to recently announced trade measures. Notably, China’s growth is projected to slow to 6.2% in 2019 from 6.9% in 2017.
Chart: Real GDP Growth by Country Group (year over year)
Risks are to the downside in IMF projections due to elevated policy uncertainty, among other factors. Rising trade barriers, a reversal of capital flows to weaker emerging market economies and higher political risk are beginning to slow growth. Also, financial accommodation could tighten rapidly in advanced economies if trade tensions and policy uncertainty expands.
Related: An Important Year for Bond Investors
At SNWAM, our base case scenario is similar to the IMF’s, as we are calling for continued yet slowing U.S. economic growth. Risks to growth are increasing, and last week’s stock and bond sell-off is a reminder that it’s best to be cautious; financial markets can turn down well in advance of economic weakness. TV spin economists offer amusing stories and keep us watching, but we will stick with data and analysis from our dull and cautious experts – substance over spin.
Source: IMF World Economic Outlook, October 2018
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