The Spring Meetings of the IMF and the World Bank will be the focus of market attention this week. IMF Managing Director Christine Lagarde has set the ball rolling, with a speech calling for policy makers to “seize the day”. She is asking for a repeat of the “London moment” in February 2009, when G20 leaders announced a co-ordinated plan to rescue the global economy.
However, while her recommendations for action are perfectly sensible, there is an air of familiarity about them. They include a call for more financial resources for the IMF; delayed fiscal tightening in some countries, combined with longer term plans for budget consolidation; easy monetary policy in the developed economies; continued reform of the financial system; renewed labour market reforms; and measures to promote fairness and eradicate poverty. With no atmosphere of crisis surrounding the Spring Meetings, there seems little chance of anything dramatic emerging on any of these fronts this week.
Nevertheless, there will as usual be considerable interest in the IMF’s analysis and forecasts for the global economy. Ms Lagarde has hinted that there is likely to be a moderate increase in the IMF forecast for global GDP growth in 2012, compared to the 3.3 per cent predicted in January. This upgrade will not, however, take the IMF forecast back to the 4 per cent rate which was predicted before the eurozone crisis erupted last autumn. The message seems to be that the economic crisis has abated slightly since the eurozone took action last December, but that the global economy is certainly not yet in rude health. In Ms Lagarde’s words: “The risks remain high; the situation fragile.”
IMF forecasts only rarely differ very much from the consensus of outside forecasters. The table below shows Fulcrum’s compilation of GDP forecasts made by the major economics teams in the financial markets in March 2012, compared to the forecasts made last November and last August.
A few points are noteworthy from this table, and all of them are likely to feature strongly in the IMF outlook when it is published on Tuesday. The key points are:
First, although there have been enormous swings in financial asset prices since last summer, the changes to global GDP growth forecasts for 2011-13 have in fact been very minor. Clearly, markets have been more influenced by changing perceptions of tail risk in the global economy, and of bankruptcies in the financial system, rather than by any change in their central views about economic growth.
Second, there has been a significant change in the composition of growth between the major economies. The consensus forecast for US GDP growth in 2012 has been revised upwards by half a percentage point since last summer, while that for the eurozone has been revised down by a full point. The downward revision in the peripheral eurozone economies has been particularly dramatic, amounting to 2 percentage points, but there has also been some mark down in core economies, including both France and Germany.
Given the fact that fiscal tightening in the peripheral economies has still not reached its climax, it is impossible to be confident that the eurozone recession over the remainder of 2012 will prove to be as shallow as forecasters currently predict. This is why the IMF is pointing to continuing downside risks from this source.
Third, there has been almost no change in the consensus forecast for the BRIC economies. A soft landing in China was widely anticipated last autumn, and this view has not changed in recent months, despite some fluctuations in the data flow from one month to the next. The activity data for China, published last week, showed a weak GDP outcome for Q1, but some improvement in industrial production and retail sales in March. The recent data are in line with the market expectation of GDP growth of about 8.5 per cent in 2012 as a whole.
The overall IMF picture, then, will be one in which global growth is steady, at slightly below its long term trend rate, and where the main downside risks stem from the eurozone and, until a cyclical trough is confirmed, China. None of that is likely to surprise the markets.
The next big move in sentiment about risk assets will be heavily influenced by whether the global economy, taken as a whole, speeds up or slows down from here. One way of monitoring this is to observe the behaviour of the major leading indicators for the global economy, as shown in the graph below:
These indicators show monthly annualised changes in the OECD and Goldman Sachs Global Leading Indicators, along with the monthly change in the manufacturing PMI business survey for the world as a whole. The latest major turning point in these series occurred last summer, when the most recent down cycle in global activity hit bottom. But, as so often happens, sentiment about global growth was at its most pessimistic just when the data were starting to rebound. Since then, the upward momentum in the global leading indicators has been quite strong, and stronger than has been reflected in revisions to GDP forecasts.
So far, there has been very little indication that the global upswing is losing momentum. Unlike the early part of last year, when higher oil prices triggered a sharp downturn in all of the leading indicators, economic activity has not yet shown any signs of heading in the wrong direction. The global growth rate is still rather anaemic, and remains heavily dependent on emergency support from the central banks. But at least it is not slowing down.