IMF Report - 2019 U.S. GDP Growth Expected To Fall To 2.5%

IMF Report Wrong On 2017 Forecasts

The IMF Report offers delayed projections which means it confirms data trends we’ve been seeing for months. It’s a great summary of world growth since I don’t cover every country’s economy in my articles.

 Some people mistakenly view IMF Report forecasts as always being wrong. Skeptics might say the last time growth was downgraded was in 2016. That was a mistake as growth was bottoming just as the negative revision was made in July 2016.

A delayed projection is always going to get the forecast wrong if the growth trend reverses. It’s very difficult to capture rate of change reversals. Expecting alpha from the IMF Report is futile.

This report gives you an idea of what is priced in to the markets. Invest in the countries you are more bullish than the IMF on and bet against the ones you’re more bearish than it on.

As I mentioned, the IMF Report was wrong to downgrade growth in July 2016. It’s expectation for global growth in 2017 fell from 3.5% to 3.4%.

Instead of downgrading growth, it should have upgraded growth. As you can see from the table below, 2017 growth was 3.7%. Advanced economies grew 2.3% instead of 1.8%. Emerging markets grew 4.7% instead of 4.6%.

America missed estimates for 2.5%, coming in at 2.2%. Europe and Japan destroyed estimates for 1.4% and 0.1% growth, coming in at 2.4% and 1.7%.

IMF Report Lowers Global Growth Projections

Now let’s look at the latest projections for 2018 and 2019. As you can see, estimates for 2018 and 2019 GDP growth declined 0.2% each to 3.7% for both years.

The projections for 2018 growth aren’t that difficult to make since most of the data is already in. American growth is expected to have accelerated from 2.2% to 2.9% because of the fiscal stimulus.

With the stimulus wearing off and the trade war with China gaining steam, the IMF Report lowered global trade volume growth estimates for 2018 and 2019 by 0.6% and 0.5% to 4.2% and 4%. NAFTA and Brexit are catalysts for uncertainty.

I think the new trade agreement with America, Canada, and Mexico will be ratified, but that’s not a guarantee. The IMF is also worried about auto and auto parts imports.

Even though emerging market stocks have been cratering, the growth rate in emerging market economies is expected to remain steady at 4.7%.

The biggest downward revisions were in Argentina, Brazil, Mexico, Iran, and Turkey. They are having political woes. This can be a self-fulling cycle. Bad policies cause weak growth and then weak growth causes political controversies.

Even though Brazilian and Mexican growth estimates fell, their growth is still expected to increase. Brazilian growth is expected to go from 1.4% in 2018 to 2.4% in 2019.

Mexican growth is expected to increase from 2.2% to 2.5%. Indian growth is the highest out of the countries listed. It’s expected to be 7.3% and 7.4%.

IMF Report - American & Chinese Growth Set To Fall For Different Reasons

The estimates for American and Chinese 2019 GDP growth follow the same trend. The IMF Report lowered American and Chinese growth by 0.4% to 2.5% and 6.2% respectively.

If that occurs, growth will fall 0.4% in America and China from 2018 levels. Chinese growth has been decelerating for years. American growth will reverse course. This is due to the fiscal stimulus losing its effect and the potentially hawkish Fed.

Jaguar Land Rover announced it will temporarily close its main plant in the United Kingdom because Chinese sales are falling sharply.

The Chinese economy has been decelerating for years. There appears to have been an acceleration of the weakening as Chinese consumer confidence in August collapsed.

The chart below shows the sharp decline in monthly car sales in China on a year over year basis.

With the recent increase in treasury yields, the market is implying that the next 3 Fed meetings with a press conference will have a rate hike.  You can see from the chart below.

I don’t think that expectation will continue because I expect rates to fall in the next few months. The rate hike in December is definitely happening. However, the ones in 2019 aren’t a guarantee in my opinion.

Also, keep in mind that the December rate hike will be 20 basis points because the rate is too close to the high end of the Fed’s range. It’s reasonable to expect a growth slowdown if the Fed gets this hawkish. The Fed funds rate would quickly rise above the neutral rate.

IMF Report - Treasury Yields Might Be Too High

I have been bullish on long term treasury bonds. I will begin to be bullish on short term bonds when I think the Fed is close to ending rate hikes.

The chart below shows with the 2 year yield at 2.9%, yields would need to increase to 4.5% for traders to lose money. The Fed would need to raise rates 12 times in a year to sustain losses.

The chart below compares the global manufacturing PMI with the 10 year yield. The two metrics have been correlated up until the last few months.

Global manufacturing PMI has fallen, while the 10 year yield has risen. If the 10 year yield followed the PMI this year, it would be at about 2.5% instead of 3.2%. Manufacturing is being hurt by the deceleration in global trade growth.

IMF Report - Conclusion

Recent trade growth and manufacturing weakness has catalyzed a decline in the IMF Report global GDP forecast, with weakness specifically in China and America.

That downgrade may not be enough as the U.S. China trade impasse doesn’t look like it will reach a solution soon. American GDP growth should slow in 2019 because of the weakening effect from the fiscal stimulus, the trade war with China, and the more hawkish Fed.

The economy will start to be hurt by rate hikes if there are hikes in each of the next 3 meetings with press conferences. The 10 year yield is too high when paired with the global manufacturing PMI.

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