the July World Economic Outlook
On July 7th, the IMF released its latest adjustment to its World Economic Outlook initially published in April. There are three main changes:
1. The agency is raising its forecast for world growth in 2010, by .4% to 4.3%. Two reasons for this:
Recovery in the advanced economies from the financial shock of 2008 is proceeding faster than the IMF anticipated, even just three months ago. As a result, it is boosting its forecast for these countries by .3%. The US is a relative laggard, but it still doing .2% better than the IMF thought.
Partly because of increased demand from the advanced economies, partly from the internal dynamism of China, India and Brazil, developing economies are doing .5% better than expected.
2. The aggregate 2011 growth forecast remains unchanged, but its composition shifts. The IMF now thinks the US expand by 2.9% in real terms next year, or .3% faster than it figured in April. This gain is offset by a .2% reduction in the growth forecast for the EU, from a 1.6% gain to 1.4%.
Faster recovery this year in the advanced economies implies that inventory replenishment there will be completed earlier than expected. The IMF figures that .1% of growth that it had penciled in for next year will occur in 2010 instead.
3. The IMF comments on possible financial fallout from the EU next year. Its observations are helpful in the sense that I think they offer a worst-case scenario. The IMF base case is a “muddle through” scenario, with some loss of output in Europe both this year and next because of financial turbulence. The alternative–the assumption by the IMF that EU governments allow the situation to spiral downward to the point that an EU financial crisis does the same amount of damage to the world as the US financial crisis of 2008–then, the IMF thinks, world growth next year will be reduced by 1.5% from the current forecast of 4.3%.
The IMF gives no reasons for why a second financial crisis should be as large as the first. On the other hand, I don’t think the IMF analysis is intended to be a realistic assessment. Instead, I think it’s supposed to be a first approximation of the order of magnitude of a second major financial shock. My guess is that because the public already half-fears more financial troubles, the shock would be less than the first. Government action would probably be more focussed, as well. In any event, though, I think the interesting aspect of the IMF economic simulation is that, unlike the case in 2009–when world output contracted by .6%–2011 would still be a period of global economic expansion.
Let’s make another back-of-the-envelope calculation on the assumption that half the pain would be felt in the EU and the rest would be distributed equally around the rest of the world. That would imply that European output would fall by about 2% in 2011, producing the second recessionary year there out of three. The US would grow, but only by about 2.2%. The developing world would slow down to a “mere” 5%+ growth rate.
Again, the interesting thing for an investor is that ex the EU most individual countries would still be expanding through the European pain.
I think this is another piece of evidence that world economies are in better shape than the consensus thinks. And, as the IMF itself has commented elsewhere, the numbers point investors toward stock markets in developing countries.