IMF Issues Obligatory Downward Revision To Global Growth. Says Things Are Better, But Still Scary

The IMF has released their quarterly doom and gloom report, although this time around, it’s not quite as gloomy.

In what is now a quarterly tradition, the fund on Monday cut its forecast for global economic growth. Growth will come in at 3.3% for 2020, down from the 3.4% the fund projected in October.

The estimate for 2019 was trimmed to 2.9%. That is the sixth downward revision, which makes you wonder why they even bother. It also underscores the sheer futility of out-year estimates, which is why we didn’t include the 2021 projection in the visual (it’s 3.4%, for those curious).

“In the October World Economic Outlook, we described the global economy as in a synchronized slowdown, with escalating downside risks that could further derail growth”, the fund writes, in some of the accompanying color to the new outlook.

The fund then cites the Sino-US trade deal and reduced risk of a no-deal Brexit as factors that have helped make the macro backdrop marginally less menacing. They also note that “monetary policy has continued to support growth and buoyant financial conditions”.

That latter bit is obviously crucial. The net easing impulse (i.e., the net number of global rate cuts) in 2019 was the strongest in years:

On top of that, the net supply of government bonds will drop 40% in the new year versus 2019, according to estimates from TD. That matters because the lower the free float of available safe-haven assets, the more pronounced the hunt for yield will be.

As central banks race back to zero (and below) and expand their balance sheets, investors are forced out the risk curve and down the quality ladder, compressing risk premia and driving down volatility.

(IMF)

The IMF goes on to cite “preliminary signs that the decline in manufacturing and trade may be bottoming out”.

Assuming the “Phase One” trade deal between the world’s two largest economies actually holds (a tenuous assumption at best), the fund expects to see a reduction in the cumulative negative impact of trade tensions on global GDP of 0.3% (from 0.8% down to 0.5%) by the end of the year.

The fund reiterates that the service sector “remains in expansionary territory, with resilient consumer spending supported by sustained wage growth”. Again, they thank central banks: “The almost synchronized monetary easing across major economies has supported demand and contributed an estimated 0.5 percentage point to global growth in both 2019 and 2020”.

Naturally, the fund is skeptical about the sustainability of the nascent recovery. They call their projections of a modest inflection “uncertain” and caution that the overall outlook relies on “recoveries in stressed and underperforming emerging market economies, as growth in advanced economies stabilizes at close to current levels”.

Here are a few additional key passages (note the bolded bit):

• New trade tensions could emerge between the United States and the European Union, and US-China trade tensions could return. Such events alongside rising geopolitical risks and intensifying social unrest could reverse easy financing conditions, expose financial vulnerabilities, and severely disrupt growth.
• Importantly, even if downside risks appear to be somewhat less salient than in 2019, policy space to respond to them is also more limited. It is therefore essential that policymakers do no harm and further reduce policy uncertainty, both domestic and international. This will help to revive investment, which remains weak.
• While the baseline growth projection is weaker, developments since the fall of 2019 point to a set of risks to global activity that is less tilted to the downside compared to the October 2019 WEO. These early signs of stabilization could persist and eventually reinforce the link between still-resilient consumer spending and improved business spending. Additional support could come from fading idiosyncratic drags in key emerging markets coupled with the effects of monetary easing. Downside risks, however, remain prominent, including rising geopolitical tensions, notably between the United States and Iran, intensifying social unrest, further worsening of relations between the United States and its trading partners, and deepening economic frictions between other countries. A materialization of these risks could lead to rapidly deteriorating sentiment, causing global growth to fall below the projected baseline.
• Stronger multilateral cooperation and a more balanced policy mix at the national level, considering available monetary and fiscal space, are essential for strengthening economic activity and forestalling downside risks. Building financial resilience, strengthening growth potential, and enhancing inclusiveness remain overarching goals. Closer cross-border cooperation is needed in multiple areas, to address grievances with the rules-based trading system, curb greenhouse gas emissions, and strengthen the international tax architecture. National-level policies should provide timely demand support as needed, using both fiscal and monetary levers depending on available policy room.

For anyone so inclined, the full January update is below.