Global Daily – IMF downgrades, but still too optimistic

by: Nick Kounis , Aline Schuiling

Global Macro: IMF forecast downgrades still assume 2020 recovery – The IMF published new forecasts for the global economy today, where it revised its estimates lower. It noted that ‘the global economy is in a synchronized slowdown, with growth for 2019 downgraded again – to 3 percent – its slowest pace since the global financial crisis’. It explained the weakness as being related to ‘rising trade barriers; elevated uncertainty surrounding trade and geopolitics; idiosyncratic factors causing macroeconomic strain in several emerging market economies; and structural factors, such as low productivity growth and ageing demographics in advanced economies’. Despite the downgrades, the IMF continues to expect a modest improvement in global growth next year – to 3.4% – though it does admit that the recovery is ‘precarious’ and that risks are skewed to the downside. Our own view is that the revisions do not go far enough. Economic growth is likely to be weaker than the IMF expects in the coming months and will remain subdued for longer. That reflects the sharp hit we have seen to business confidence, that the trade ‘deal’ between the US and China is not convincing and that there are increasing signs that the weakness is spreading from manufacturing and trade to services and domestic demand. For instance, for the eurozone, the IMF expects economic growth of 1.2% this year and 1.4% next year (down 0.1% and 0.2% from its previous forecasts respectively). Our own forecasts are 0.8% for this year and 0.6% for next. For the US, the IMF expects 2.4% in 2019 and 2.1% in 2020, while we  expect economic growth to slow from 2.2% this year to 1.3% next. Our estimates are very similar for China (IMF: 6.1% this year, 5.8% next), but generally we are sceptical that the global economy will pick up significantly in coming quarters. (Nick Kounis)

Euro Macro: Germany’s ZEW index remains in recession territory – The ZEW economic expectations indicator (gauging the expectations of economists and financial sector analysts about Germany’s economy during the next six months) edged down in October, falling to -22.8, down from -22.5 in September. The current conditions component moved more significantly lower, to -25.3 from -19.9. The expectations component tends to be the part of the survey that tracks changes in economic growth relatively well. At its current level it signals ongoing modest contraction in Germany’s GDP until the end of this year. The drop in the ZEW expectations indicator in recent months has largely been driven by deterioration in the outlook for global growth and world trade and uncertainties surrounding Brexit. Indeed, the ZEW survey shows that the expectations about the US and UK economies are the worst, with a majority of the participants to the survey expecting deterioration in the coming two quarters. With regard to the expectations for the eurozone economy, most participants expect economic conditions to remain unchanged at current weak levels. Looking forward, we do not expect a deep or long recession in Germany as private consumption, government spending and construction output are expected to continue to grow solidly in the coming quarters, which will buffer the negative impact of exports and manufacturing output. Indeed, we have pencilled in another contraction of GDP in Q3 and stabilisation in Q4. (Aline Schuiling)