The International Monetary Fund (IMF) publishes its World Economic Outlook twice a year — in April and October. Last week, it came up with an update to its forecast made in April. Its global growth forecast for 2008 has been revised up from 3.7% to 4.1% and the forecast for the next year is 3.9%. Even as IMF sees a substantial deceleration in the second half of this year, it has revised its 2008 forecast higher because growth in the first quarter in many countries, including the US, held up better than expected.
However, the more puzzling aspect of the IMF forecasts for growth is the forecast for growth on a Q4-to-Q4 basis. According to IMF, “growth would decelerate from 4.8% in 2007 to 3% in 2008, before picking up to 4.3% in 2009.” This is rather amazing. If IMF, being aware of more facts than most other analysts, could dismiss the current set of circumstances as causing no more than a minor blip in the global growth stakes, then one should not be surprised by many ordinary investors still willing to buy the dips in stock markets.
In the official published view of IMF, all developed countries, including Japan, find their economies restored to almost full vigour or even something exceeding that in the second half of 2009. The only relative laggard is the euro zone. Developing countries breeze through the entire forecast period without ruffling even one hair on their eyelids. China’s growth rebounds to 11% on a Q4-to-Q4 basis by 2009. Now, where does this optimistic global economic recovery leave the price of oil and other commodities? Unfortunately, the briefing does not leave us much wiser on that as there is most assuredly a typographical error in their oil price forecast.
IMF’s forecasts would have been less unacceptable had it characterized the risks surrounding the forecasts as tilted to the downside. Instead, it says that the risks are balanced, although it recognizes that the global savings and spending imbalance has not been resolved but has merely been shifted from the US to Europe, with the savers further expanding their accumulation of international reserves in recent months.
In his testimony to the US Congress last week, Ben Bernanke devoted a paragraph to the tight supply conditions in the oil market, prompting some Credit Suisse analysts to wonder if all central banks had decided to allow oil demand to be destructed via recessions as the only way to bring about lower oil prices. I doubt if the Federal Reserve would take such a risk when the consumer spending outlook remains rather uncertain as it is. Further, the policy stance of many Asian nations leaves little scope for doubting their preference for growth over reducing oil consumption or for fighting inflation.
More broadly, the IMF forecast update leaves many issues unaddressed. First, there are simply not enough resources for all nations to reach the Western standards of material living built around hydrocarbons and the philosophy of more is preferred to less. Second, a proximate issue is whether the average American household would be willing to continue to borrow to finance consumption, faced with a mountain of debt, shrinking asset values and impending retirement.
A similar situation prevails in the UK and some parts of continental Europe. Even if there is willingness to borrow, are lenders ready to relax lending standards again and lend to consumers in the middle of a historical and mammoth shrinking of balance sheets that expanded recklessly in the first place and likely more unforgiving regulators, at least for a while? Third, if this is accepted as far-fetched, then growth is sustained “as long as the US government is willing to issue debt, the Federal Reserve is willing to accommodate the debt with low interest rates and foreign central banks (CBs) are willing to accumulate US debt,” as Prof. Tim Duy notes in a different context (see http://economistsview.typepad.com/economistsview/2008/07/tim-duy-not-so.html).
As regards the willingness of foreign CBs to accumulate US dollar paper in such a scenario, this paragraph holds clues not only for the future of the dollar but also for the price of oil and, of course, for the impossibility of IMF growth forecasts, Bare Talk will draw your attention to this comment:
“What is the point of producing more oil and selling it for an unguaranteed paper currency?” the Kuwaiti oil minister had rhetorically asked. “Why produce the oil which is my bread and butter and strength and exchange it for a sum of money whose value will fall next year by such-and- such a per cent?” Perhaps, some Saudis argued, their own country should do the same and substantially cut back on its output.” (From Daniel Yergin’s The Prize, helpfully recalled in the Credit Suisse Global Strategy Blog).
V. Anantha Nageswaran is head, investment research, Bank Julius Baer & Co. Ltd in Singapore. These are his personal views and do not represent those of his employer. Your comments are welcome at firstname.lastname@example.org